Many cities roll out beautiful decorations at this time of year, but no one does the holidays like New York. I started the week visiting clients there, and the walks between meetings took me past a number of gorgeous window displays. Creative and colorful, they are a magnet that lures shoppers to Midtown.
Retailers will need all the energy they can generate during the coming month. After two very strong holiday seasons, 2023 is likely to be softer; sales gains are expected to be about 3% this year, as compared to 5.7% last year and almost 13% in 2021. A series of forces are at play:
- Household finances are not as strong. Among the bottom half of the income distribution, excess savings accumulated during the pandemic have dissipated, and the use of credit has increased.
- As we discussed recently, the American labor market is still strong, but showing signs of softening.
- While confidence surveys don’t always track with spending behavior, levels of consumer confidence in the United States remain depressed.
- Spending is still favoring services over goods, by some margin.
American consumers have had a great run. They are the primary reason why the U.S. economy has outperformed so consistently in the last year. But their means have become more limited, and their purchasing has become more frugal. We can see this in retail profit margins, surveys of pricing power and mentions in earnings calls. Anticipating this, merchants held Black Friday events weeks before Black Friday itself.
These promotions illustrate the difficulty in defining holiday sales. The period between Thanksgiving and Christmas used to define the season, but shoppers are starting much earlier than they used to (especially if incented to do so). And the redemption of gift cards carries receipts well into January.
Some analysts dismiss holiday spending as being a small part of a bigger picture. Nonetheless, it continues to garner substantial attention.
My holiday budget didn’t have room for anything from Tiffany or Louis Vuitton, but the shops were busy. More so than many years, seasonal spending at the end of 2023 will provide a window into the state of the economy.
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