Holiday sales in 2012 got off to a strong start. But as I warned last month, surging sales on Black Friday are not always indicative of a robust holiday season.
Despite record-breaking sales over the Thanksgiving Day weekend, the 2012 holiday sales season limped to a disappointing finish. For the eight weeks from October 28th through Christmas Eve, retail sales rose just 0.7% from the year before according to Mastercard’s Spending Pulse unit. If the initial estimates hold, that would make 2012 the worst holiday season since 2008.
What happened, and what should investors expect going into 2013? First, as discussed last month, often a strong Black Friday simply means that merchants are pulling sales forward. Second, it did not help that the fiscal cliff drama resisted a quick conclusion. With consumers facing uncertainty over taxes, it should not be surprising that November’s enthusiasm deteriorated into December’s angst. Finally, as I’ve discussed on several occasions, the underlying consumer fundamentals remain weak. Disposable income growth is running at 3.5%, roughly half its long-term average. For hourly workers, gains are even more anemic. Tepid income growth was always going to be a big headwind.
Unfortunately, absent a more robust recovery in the labor market, this is likely to get worse, at least in the near-term. Under the bare bones fiscal cliff deal that was reached, payroll taxes will revert back to 6.2%, which will result in a $30 billion a quarter hit to take home pay. And while the deal redefined the idea of “wealthy” by pushing the threshold to $400,000 (for individuals, $450,000 for joint filers), higher marginal rates for these top earners will mean a hit to disposable income in the near-term.
Finally, there is an additional headwind which will be felt this quarter. Because of all the uncertainty over tax rates and the alternative minimum tax, we’re all likely to see a big delay in receiving tax refunds. In the first quarter of 2012, the IRS cut checks for over $200 billion to 75 million taxpayers, each check averaging about $2,800. On November 30th, the Chairman of the IRS oversight board warned the Senate finance Committee that more than 60 million tax payers would have to wait until late March or later to file their returns and receive a refund. This delay represents yet another hit to household cash flow for the start of the year.
Even though the fiscal cliff has been narrowly avoided (or at least delayed), consumers are likely to face a triple hit in early 2013: higher payroll tax on all workers, higher marginal rates on upper-income households, and a likely delay in the refund process. The likely outcome is that Q1 spending will be unusually weak, even by recent standards.
For investors, there are a several implications. They should have modest expectations for Q1 growth and assume rates will remain low for the first part of the year. U.S. equities may continue to trail international markets, and consumer discretionary stocks – particularly retailers – remain vulnerable.