Saturday, November 27, 2010

Unicredit : Christmas shopping season: So−so in the US, ho−ho in Germany

  • Black Friday. The day after Thanksgiving traditionally marks the beginning of the holiday shopping season in the US. Many retailers generate one quarter or more of their annual sales in the final weeks of the year.
  • Hope. Now that the US economy has emerged from the Great Recession, the National Retail Federation expects satisfactory sales growth again; but at 2¼% it will probably remain well shy of the holiday shopping seasons of the pre-crisis years. Consumers’ propensity to spend remains muted in light of the still miserable job situation (page 2-5 & chart below).
  • US. We do not expect private consumption, which is so important for the US economy, to take off in the coming year either. There will be a headwind from the again increasingly restrictive fiscal policy – even if the Bush tax cuts are extended. The economy will, however, continue to recover, albeit at a still very moderate pace.
  • Germany. The picture is different in Germany. Industry representatives are betting on a glittering, even "spectacular" Christmas shopping season – the best in five years! While there may be elements of hope involved here, sentiment is good, and the propensity to buy remains high thanks to falling unemployment and rising income expectations.
  • Eurozone. The German upswing is not only robust, it is also gaining in breadth. Domestic demand is increasingly joining exports as a driver of growth. The picture is similar in France, with both countries lifting EMUwide growth (page 6). Therefore, we will likely see the ECB forge ahead with its exit strategy (page 7-8). Nevertheless, growth divergences within the EMU are intensifying.
  • Further topics:

– Data outlook: EMU economic climate continues to improve;
US purchasing managers more reserved again (page 9).
– Market outlook: EUR to remain under pressure (page 17).
US: Cautious Optimism Ahead Of The Holiday Shopping Season
Today is “Black Friday“, which traditionally marks the beginning of the holiday shopping season in the US. Many retailers generate roughly one quarter of their annual sales in November and December.

Surveys indicate that retailers are cautiously optimistic for this year’s holiday season. The National Retail Federation, for example, expects sales to increase by 2.3%. That would be the strongest gain since the beginning of the Great Recession.

After private consumption in 3Q already posted its strongest increase in four years, household spending is likely to rise another 2¼ to 2½% in the current quarter. In September, real consumption expenditures already exceeded again their pre-crisis peak.

At the beginning of the coming year, the dynamic is, however, likely to slow again. The reason for this is a more restrictive fiscal policy. This holds true even if all the Bush tax cuts were to be extended.

The Importance Of The Holiday Shopping Season For Retailers
Today is Black Friday. The day after Thanksgiving traditionally marks the ceremonial kickoff of the holiday shopping season. It is not uncommon for department stores to already open their doors shortly after midnight. Lured by amazing deals, many customers from Los Angeles to New York can hardly wait for the stores to open. The term "Black Friday" refers to the beginning of the period in which retailers go from being “in the red” to being “in the black”, i.e. to making a profit. That reveals how important the holiday shopping season is for many retailers.

Retailers that rely most heavily on the holiday shopping season (category GAFO+, cf. box) report substantially higher sales in November and December than in the rest of the year. Overall, they post close to one quarter of their total annual sales in November and December (cf. chart in the next column). In December, sales at clothing and accessories stores or sporting goods, hobby, book and music stores are even about twice as high as the average for the months of January through October (cf. table in the following box). A glance at retailers’ profits, too, reveals the importance of the holiday shopping for the industry. At the end of the year, after-tax profits are in many cases 40% to 60% above the level of the first three quarters.

Two of the few exceptions to this rule occurred in 2007 and 2008, when the beginning of the financial market crisis (mid-2007) and the bankruptcy of Lehman Brothers (autumn 2008) took a toll on consumer spending, and thus on retailers’ profits (cf. chart next page). But since the US economy has emerged from the most severe recession since WW II, retailers are now in the black again. After-tax profits in 1H 2010 were even the highest in three years.

Cautious Optimism
Surveys for the current year point to a satisfactory holiday shopping season. The National Retail Federation (NRF), for example, expects sales to increase by 2.3% yoy (cf. chart). While this outlook is still much more cautious than during the pre-crisis period (1995-2007), when retailers had on average projected an increase of 5%, it is slightly more positive than in 2008 (+2.2%) and 2009 (-1.0%).

If the NRF projections were to prove accurate, holiday sales would again rise to USD 447bn in the current year. But while that would be the highest level in two years, it would still be 1¼% below the pre-crisis peak – even in nominal terms (cf. chart next column).

The risk to this forecast is probably balanced. On the one hand, retail sales rose solidly in the first ten months of this year (+5% yoy). The historical correlation shown in the following chart suggests that after such a gain between January and October sales in November and December should increase by 3½% rather than by 2¼%, as projected by the NRF.

On the other hand, a representative survey conducted by Gallup Poll shows that the majority of households (52%) is not planning to increase holiday spending this year. Another 34% of respondents stated that they intend to spend less on Christmas gifts than in the previous year, while only 12% said they will spend more (cf. chart next page).

Risk For The Labor Market
To cope with the sharply rising demand during the holiday shopping season, retailers hire a huge number of temporary workers between October and December. In the last twelve years, these holiday hires averaged more than half a million per year (cf. chart).

Accordingly, the seasonal factors "expect" employment to increase strongly in November and December. Since most hires already take place in November, roughly 360k jobs are subtracted here for the seasonal adjustment; followed by another 180k in December (cf. table next column). If actual hires were to lag behind the normal pattern, the seasonally adjusted employment numbers will be correspondingly lower. That was, e.g., the case in 2008.

As the recession was just starting to escalate at that time (after the collapse of Lehman Brothers), retailers hired only 285k additional sales personnel in November and December 2008 and, therefore, much fewer than expected by the seasonal factors. As a result, seasonally adjusted employment in the retail sector fell by 215k in late 2008. In the past year, seasonally adjusted retail employment declined again at the end of the year, even though retailers had hired more than 450k additional employees in November and December.

Solid Start To The Fourth Quarter...
As previously mentioned, consumption expenditures recovered solidly in the run-up to the holiday shopping season. In the third quarter, private consumption already posted its strongest gain in four years (+2.8%). And the start to the current quarter was solid as well, as real household expenditures rose another 0.3% in October. Already in September, real consumer expenditures exceeded again their pre-crisis peak and marked a new all-time high (cf. chart).

Consumer spending is likely to expand slightly more slowly in the current quarter than it did in late summer. But if the expectations for moderate sales growth during the holiday shopping season are not disappointed, real consumption expenditures should increase another 2¼%-2½% in 4Q.

... But Fiscal Policy Will Be A Drag At The Beginning Of 2011
In the first half of 2011, however, consumer spending is likely to lose some momentum again. The main reason for this is a more restrictive fiscal policy. Because even if all the Bush tax cuts were to be extended (which at the moment appears to be the most likely outcome), some fiscal measures that had supported disposable incomes in past months and quarters are set to expire at the end of this year. Most important in this context is probably the end of the Making Work Pay tax credit. This tax provision, which was passed at the beginning of 2009 as part of the American Recovery and Reinvestment Act (ARRA), has reduced the first USD 400 of tax liability for taxpayers making less than USD 75,000. If the program were to expire as planned, that alone would reduce households’ disposable income by USD 60bn, and lower the increase in consumption expenditures in 1H 2011 by about one percentage point. Overall, the drag from all expiring ARRA provisions on 1H GDP growth should be about 1½ to 2 percentage points (cf. chart next column).

An additional question mark is the future of Emergency Unemployment Compensation, as the current law is set to expire at the end of November. If Congress fails to agree on an extension, federal unemployment benefits would – according to calculations of the Congressional Budget Office (CBO) – decline from USD 160bn in the current year to USD 93bn in 2011.1 Apart from the serious ramifications for the families affected, the concomitant decline in disposable income would be an additional strain on consumer spending at the beginning of next year.
Full report: Christmas shopping season: So−so in the US, ho−ho in Germany

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