Consumer spending looks strong as the holiday shopping season approaches

By Frank Holmes

The economy may be faltering, but you wouldn’t know that just by looking at the spending habits of American consumers.

The economy may be faltering, but you wouldn’t know that just by looking at the spending habits of American consumers.

Retail sales rose 1.3% in October from September, according to Census Bureau data. Some economists put the increase into context by pointing out that Amazon held a Prime Early Access sales event in October, while California handed out more than $5 billion in inflation-reduction checks. Higher prices for everything, including new vehicles and fuel, also contributed to the jump in retail sales.

Despite stubbornly high inflation and recession fears, consumer spending may not slow as the busy holiday shopping season approaches.

In its annual holiday spending forecast, the National Retail Federation (NRF) says it expects sales to grow between 6% and 8% from last year, potentially making this season the third-best year in 20 last years after 2020 and 2021, when American consumers were stuck at home and filled with pandemic stimulus money. Holiday sales could reach $960.4 billion as “consumers remain resilient and continue to shop,” said NRF President and CEO Matthew Shay.

The big exception seems to be Target. Last week, the Minneapolis-based retailer warned shareholders of lackluster spending this holiday season due to rising prices. Although sales were slightly higher in the third quarter compared to the same quarter last year, mainly due to higher consumer prices, operating profit was down nearly 50% due to a increase in expenses.

The luxury market is expected to grow 21% this year, 3% to 8% next year

Target aside, I think the holiday forecast is incredibly constructive for retailers. This includes luxury retailers, many of which reported strong third-quarter results. Industry leader LVMH announced a 19% increase in sales compared to the same quarter last year, while Kering (parent company of Gucci) and Hermes recorded increases of 14% and 24%, respectively.

Last week, Bain & Company reported that the global luxury market was poised to grow 21% this year, reaching $1.4 trillion. The company expects sales of personal luxury goods to grow another 3-8% next year, even as the global economy is expected to contract.

Unlike during the financial crisis of 2008-2009, when consumers reduced their purchases of luxury items, today’s luxury market looks poised to grow with a base of broader global consumers and greater concentration among high-income shoppers, Bain said.

$1.7 trillion remaining in pandemic-related savings

There could be two things in particular supporting strong retail sales: excessive savings and a reliance on credit cards.

In a report released last month, the Federal Reserve said US households still hold onto a significant portion of their savings in the event of a pandemic. At their peak, Americans were saving up to 33% of their disposable income.

The rate has since fallen to just over 3%, but Americans still have access to a whopping $1.7 trillion. This represents about 75% of the total money that households have collected and saved during the pandemic. Reserves are regularly depleted, but there are still plenty left to sustain consumption in the short to medium term.

U.S. consumers still have 75% of excess pandemic savings

Average APR hits a new all-time high

And how do Americans choose to transact? Credit cards, apparently.

In the third quarter, credit card balances jumped 15% year over year, the biggest annual jump since the New York Fed began tracking this data. More than 190 million Americans have at least one credit card, while half of all American adults have at least two. Some 13% have five or more, according to the New York Fed.

Credit card balances have grown the most in nearly 20 years

With interest rates on the rise, this could be an issue to watch. The average annual percentage rate (APR) for retail cards just hit a new high of 26.72%, with some exceeding an incredible 30%, according to Retail credit cards differ from general purpose cards in that they are issued by or on behalf of a store. Among the highest APRs belonged to cards issued by Kroger, Macy’s, Exxon Mobil, Speedway and Wayfair.

Total household debt at $16.51 trillion

While I’m at it, total US household debt hit a new record high of $16.51 trillion in the third quarter, according to a separate report from the New York Fed. This represents an increase of $351 billion from the previous quarter, a sign of strong consumer demand and rising prices.

US housing debt at a record high of $16.51 trillion

Mortgages remained the top category, accounting for nearly three-quarters of total debt. However, the bank points out that the number of new home mortgages slowed to a pre-pandemic low in the quarter as 30-year mortgage rates climbed above 6%, the highest since 2002.

Originally published by US Global Investors on November 21, 2022.

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Holdings may change daily. Holdings are reported at the end of the most recent quarter. The following securities mentioned in the article were held by one or more accounts managed by US Global Investors as of (09/30/22): LVHM Moet Hennessy Louis Vuitton SA, Hermes International SA, Kering SA.

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