Housing weakness, a cooling economy and rising energy prices are collectively weighing on the minds of consumers, who are decidedly downbeat going into the holiday season according to most sentiment surveys. FTI retail experts believe that wage income growth should ultimately overcome these other negatives, resulting in a 2007 holiday season sales forecast that is tepid, if not disappointing, compared to recent years.
With the slowdown in retail sales growth, comes a shift in what consumers are buying: Retail sales growth has been gradually slowing for over a year but that's not the entire story. Consumers are also changing their purchasing basket, increasing their buying of basics, like consumables and some apparel while deferring purchases of bigger ticket items. Some retail sectors that were mediocre performers for the last several years, like supermarkets and drug stores, are enjoying newfound popularity amid these shifting spending priorities by consumers, while erstwhile standouts, such as home improvement and home furnishings chains, are arguably mired in a recession already with little prospect of improvement on the near horizon.
Declining home prices will likely worsen, as will its impact on spending: A phenomenon that most homeowners have rarely, if ever, experienced yet is happening in many parts of the country is the sudden decline in home prices. With no bottom to the housing downturn yet in sight, Americans will have to confront the reality of declining personal wealth attributable to their homes. In many cases this will result in real and harsh economic consequences. FTI experts feel home prices will in all likelihood continue to fall in 2008. Compounding the issue is the fact that household wealth attributable to home equity is by far the largest source of wealth for the vast majority of Americans, far surpassing their holdings of financial assets.
The exaggerated impact of energy prices on consumer spending: According to Regan, energy costs remain an overrated variable in the consumer spending equation. A causal relationship between higher energy prices and weaker spending is implied regularly in the business media whenever it speaks of the financial toll of high gas prices on consumers, but the statistical evidence supporting this inverse relationship has been unimpressive for over twenty years. That, however, could change if average gasoline prices go much beyond $4.00 per gallon nationally.
The gift card factor: The impact of gift cards continues to complicate the accurate measurement of retail sales during the holiday season as their popularity grows ever larger. Many economists now include the month of January as part of the holiday season period in order to capture sales pertaining to the redemption of these cards. However, widely varying estimates of the redemption rate of holiday gift cards that occurs by the end of January opens up the possibility that significant redemptions don't occur until even later. If so, this means that some retail sales related to gift card redemptions will escape the holiday season measurement altogether even if January is included. Much work needs to be done to better understand this development.
