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Beware the Holiday Blues

Inflation uncertainty is putting key retail season strength in doubt.
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Most retailers depend on the holiday season, but this year it’s anyone’s guess how that will turn out. 

“The week's inflation data, which was hotter than expected, reignited questions over how transitory inflationary pressures will really be," the  Action Alerts Plus team wrote recently. "Paired with the continued pinch at the gas pump and rise in food prices as well as others, we suspect upcoming quarterly results from retailers could raise questions over the expected strength of the 2021 holiday shopping season.”

Most businesses have counted on a strong 2021 to counterbalance weak sales in 2020 (the so-called “V-shaped recovery”). And it’s important to note that there’s evidence to suggest that may happen. Consumer purchases of physical/durable goods have been way up for most of the year, leading to a booming retail sector going into the holidays. The question is whether those trends will continue, or whether economic headwinds will slow things down.

The AAP team continued “while we recognize the data contained in the October Employment report showed robust job as well as wage gains, the initial read on November consumer sentiment from the University of Michigan showed that metric falling to 66.8, the lowest level since November 2011. According to the survey, the reason for that plummet was ‘an escalating inflation rate and the growing belief among consumers that no effective policies have yet been developed to reduce the damage from surging inflation."

The survey goes on to reveal that 50% of all families expect lower real incomes in 2022 because of inflation, despite widely reported nominal income gains. This means we'll be focused even more so on job creation, wage gains and other hard economic data in the lead up to the year-end holidays.”

Consumer sentiment is a data point which should be taken with a grain of salt. While historically an extremely valuable macroeconomic tool, in recent years the most reliable predictor of how someone will reply to these surveys is political affiliation. When the White House changes hands, Democrats and Republicans typically report a 20 – 40 point reversal in how they respond to questions like consumer sentiment, expectation of future income, and overall economic confidence.

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That trend bore out after the 2020 election, as granular data from the University of Michigan’s survey indicates that consumer confidence among self-identified Democrats jumped by more than 30 points while falling among self-identified Republicans by roughly the same amount. This is not, it should be noted, an artifact of pandemic-era conditions. Political alignment was the strongest indicator of consumer sentiment during the Obama administration as well, and began growing significant during the Bush era.

So it’s important to look at consumer behavior along with survey responses. Despite reporting low confidence for the future, consumers continue to spend heavily and quit rates remain high. This indicates that households feel confident about their own finances and job prospects, even as they report uncertainty about those issues for the economy overall.

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