Holiday Sales 2007: Understanding the True Story

These aren’t worth much right now (because predictions based on surveys are often wrong), but here is an article detailing the predictions for this year holiday sales.

From Washington AFP:

US consumers, battered by a horrific housing slump and soaring energy costs, are expected to show caution in holiday spending this year, putting more pressure on retailers and the overall economy, analysts say.

Surveys project tepid growth in gift spending for the holiday shopping season set to begin Friday, the day after the Thanksgiving Day holiday.

The grim outlook has retailers starting early promotions and discounts to get consumers out and ensure that stores are not stuck with too much merchandise.

The National Retail Federation is projecting a 4.0 percent rise in holiday spending. A separate survey by Ernst & Young suggests growth of 4.5 percent.

Ratings firm Standard & Poor's predicts general merchandise sales to rise only 3.0 to 3.5 percent, well below increases of 4.9 and 5.8 percent in 2006 and 2005, respectively.

That would keep nearly flat the 250-billion dollar holiday shopping season in November and December that typically accounts for about 23 percent of annual retail sales and even more in profits, according to S&P.

I recently heard a brief tidbit on the radio from the fellow at Ernst & Young responsible for driving their retail sales analyses, he says E & Y uses a different model based on Government data and sees only a slight downtick this year compared to last. I had to laugh at his reference to “Government Data” since the economic data from the Government is completely disconnected from reality and the inaccuracies become exaggerated during an economic downturn. Since the Government data is flaming rubbish, what does that make a forecast based on the same data?

My view is that the housing boom, abuse of credit and home equity withdrawals helped mask the impact of energy, food and healthcare inflation on the American consumer; in addition to inflating retail sales and/or enabling people to live well above their means. The sales of the last couple of holiday seasons were financed with credit cards and home equity loans. I’m sure there are many instances where an individual consumer hasn’t paid off their purchases from holiday season ’03, and/or are facing foreclosure on a house that’s full of items purchased with a HELOC.

With the housing market in a full-on recession and home equity withdrawals declining rapidly, it’s quite obvious that retail spending is poised to take a big hit during the coming holiday season. The retail spending decline will be greater than the final numbers indicate, since price inflation will inflate sales numbers in excess of their impact on earnings AND with respect to the amount of goods purchased. Think of it as retailers reaping fewer profits per dollar spent and the consumer purchasing fewer goods. YoY spending would have to significantly exceed last year’s numbers just for retailers and consumers to see the same level of benefit/profit. I suspect that the actual number for YoY sales growth will be closer to the S & P's conservative number of 3-3.5%, with the net impact being far lower due to inflation.

Finally, a significant YoY increase in consumer spending during the holidays is a BAD thing because it means that consumers are continuing to live above their means. This country simply cannot build a stable economic future on the backs of people spending more than they earn and living off of debt, it’s a house of cards that will crumble eventually. Signs that the consumer is starting to pull back and save are NOT bad signs, they’re positive signs for the long-term economic stability of our nation.

A full-on popping of the consumer credit bubble could be more financially disastrous than the mortgage crisis, cheering for the consumer to continue to overspend for the sake of short-term gains is completely fatuous. If holidays sales in 2007 and 2008 show significant gains it’s NOT a sign of strength, it’s a sign of people living above their means and creating a severe economic problem for the future.