Where Will the Holiday Shopping Season Lead Us This Year?

Janet Yellen Stays the Course

Major equity indices rose for the sixth consecutive week, with the Dow Jones Industrial Average up 1.3% and the S&P 500 rising 1.6%.

As expected, Janet Yellen stole the spotlight, but offered only modest insight into the next stage of Federal Reserve leadership. Economic data continued to paint a mixed picture, but overall data was leaning slightly positive.

During the course of the week, Janet Yellen made an appearance in front of the Senate banking committee to discuss the role of the Federal Reserve. Yellen’s prepared remarks and comments during the Q&A section were largely status quo, but she reiterated views held by Ben Bernanke that unemployment is still too high and the economy is below full potential. By all accounts, it appears the transition from Bernanke to Yellen will be uneventful to start. Maintaining current policy will likely be a tailwind for markets through the end of the year.

Economic releases were sparser last week, but there was a bit of good news. Specifically, industrial production was down 0.1% in October, but underlying components were reasonably strong. Utilities fell 1.1%, but this series tends to be volatile, while manufacturing output rose 0.3%.

Source: Econoday

Enthusiasm about the manufacturing sector was held back by a lackluster Empire State Manufacturing Survey, however. The general business conditions index fell from +1.5 in October to -2.2 in November. While it was a modest change at the headline, the November figure was the first negative reading since May, and several of the underlying components deteriorated sharply. New orders stood out after dropping from +7.8 to -5.5.

In a less than surprising development, small business optimism ticked lower last month. Citing “Washington paralysis,” the small business optimism index went from 93.9 to 91.6. According to the survey, seven of ten sub-components fell during the month, including declines in hiring expectations, sales expectations and overall economic expectations. Continuing a recent trend, small business owners pointed to government regulations, taxes and poor sales as their three most important concerns.

Source: National Federation of Independent Business

Outside the U.S., several important developments took place. In Europe, confirmation of recent inflation data revealed a 0.7% increase in prices over the past twelve months. Additionally, 3rd quarter GDP was positive for the second consecutive quarter across the Eurozone. Unfortunately, GDP only grew 0.1%, weighed down by Italy and France, which continue to experience economic contraction.

Source: Trading Economics

Chinese headlines were dominated by the Third Plenum of the 18th Congress, which concluded last week. Communist party officials unveiled a range of reforms, from a loosening of the one child per family rule to protections for farmers rights. Initial review of the reform measures was negative, pushing the Shanghai Composite down 1.8% on Wednesday, but an early leak of broader reforms that were due to come out Friday evening reversed those losses and sent the Shanghai Composite up 1.7% on Friday.

According to Barclay’s research, the Friday release was approximately 21,500 words, addressing 15 areas for reform and 60 tasks for the party to accomplish. Some of the important issues addressed include opening state businesses to private investment, transferring as much as 30% of profits made by state capital to public finances, and changes to rural land rights. Over the weekend, the initial take on these announcements was favorable, but as with most things, the consensus seems to be that time will tell whether China is ultimately successful.

Where will the holiday shopping season lead us this year?

The unofficial start to the holiday shopping season kicks off in a few short days. Economic uncertainty abounds, raising fears that consumers will pull back from spending, but some positive developments suggest consumers will be just fine.

With the holiday shopping season approaching quickly, it is time for the annual spending projections from the National Retail Federation (NRF). By the NRF’s estimates, retail sales will grow 3.9% in November and December compared to 2012, bringing overall sales to $602.1 billion.

Not everyone agrees with the NRF, though. A recent survey from Gallup shows that consumers anticipate spending $704 on Christmas gifts this year, down from survey results of $770 at the same time last year.

Source: Gallup

The consumer disconnect resides in a lack of confidence resulting from recent events in Washington, along with general concern about the labor markets. Consumer confidence tanked during the shutdown, buttressed by poor wage growth, and stagnant savings rates. Politicians were only able to reach a temporary resolution, which means that consumers may be faced with another round of political bickering beginning in mid-December. A poll conducted by the NRF in October revealed that 29% of consumers would alter holiday spending plans due to political gridlock.

But, there is good news that could impact overall spending during the next 45+ days. For one, retail gas prices are sharply lower, as tensions in the Middle East settled down. After peaking near $3.75/gallon, retail gas prices are hovering around $3.19/gallon, the lowest such level since 2011.

Source: Gasbuddy.com

In addition, retailers recognize the fragile psyche of consumers this season and are bringing sales efforts forward. Walmart, for instance, began holiday promotions on November 1, a full month earlier than normal. The retailer also plans special sales at 6pm and 8pm on Thanksgiving Day. Similar efforts are in the works from Toys R Us, Best Buy, Target, Macy’s, J.C. Penny, and others. Somewhat amazingly, as many as 28% of 2012 Black Friday shoppers were in stores by midnight Thanksgiving Day. That number is expected to grow this year.

Source: National Retail Federation

Early indications are encouraging. In the week ending November 12, the Redbook Index, which measures year-over-year same store sales growth, was up 3.3%. Not a huge increase, but a positive development and closely in line with projections from the NRF.

Source: Trading Economics

The final piece of good news is something of a catch-22. After years of paying down credit card debt, consumers saw credit debt increase by $4 billion in the third quarter to $672 billion. This is a signal that consumers feel more confident about their economic prospects, but it also means that yes, consumers are beginning to ramp up debt. Depending on the impact of the government shutdown in October, consumers could be inclined to embrace more credit debt to supplement holiday spending plans.

Source: Federal Reserve Bank of New York

There are reasons to be bullish on consumer spending this holiday season, from more aggressive retailer sales, to lower gas prices putting more money back in consumers’ pockets. Unfortunately, the government shutdown in October, and a possible reemergence of government issues in December, could outweigh any positive developments.

The Week Ahead

Quite a few data releases come out this week. Most closely watched among those will be retail sales, CPI, PPI, PMI Manufacturing, existing home sales, and the Job Openings and Labor Turnover Survey.

The world of central banking is quiet this week, but meetings will take place in Japan, South Africa, and Turkey. The FOMC also releases minutes from its October meeting on Wednesday afternoon.

A small number of companies have yet to report earnings and will announce results this week. Included on that list are Best Buy, Home Depot, Deere & Company, Dollar Tree, Gap, and Abercrombie & Fitch.

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