Contracting corporate margins and ongoing trade war negotiations make the performance of this upcoming holiday season even more important for US public equities this year. The US consumer continues to drive economic growth and the last two months of the year is when many companies, particularly retailers, make their year.
The good news: the National Retail Federation forecasts holiday retail sales to rise 3.8%-4.2% y/y during November and December 2019 to roughly $730 billion. That compares to an average holiday sales increase of 3.7% over the last five years. A few cautionary notes from the report, however:
- “The effect of tariffs on holiday spending — either directly or through consumer confidence — remains to be seen. Some holiday merchandise — including apparel, footwear and televisions — is subject to new tariffs that took effect September 1, and other products will have the tariffs applied on December 15.”
- “79% of consumers surveyed for NRF in September were concerned that tariffs will cause prices to rise, potentially affecting their approach to shopping.”
- “Holiday sales during 2018 totaled $701.2 billion, an unusually small increase of 2.1% over the year before amid a government shutdown, stock market volatility, tariffs and other issues.”
Therefore, in order to gauge the inflationary effects US consumers may face this holiday season we looked at a basket of popular holiday gift items in the Consumer Price Index. Here’s the annual change in pricing for each from September 2018 to September 2019 (latest available data):
Women’s and Girls’ Apparel: Those shopping for female apparel will enjoy a decline of 2.9% y/y in pricing. Women’s apparel (-3.2% y/y) prices are down even more than girls’ apparel (-1.1%).
Men’s and Boys’ Apparel: In contrast to female wear, pricing for male apparel is up 2.7% y/y as of September. Prices for boys’ clothing (+5.4% y/y) is up even more than men’s (+1.9%).
Jewelry: Prices for jewelry are essentially flat over the last year through September, up only 0.1% y/y. Falling prices helped from June-July ’19 (down a seasonally adjusted 1.1%) and even more in July-August ’19 (-4.2%). Prices here only edged up a seasonally adjusted 0.3% in August-September ’19.
Watches: These are usually high-ticket items, but watch pricing was down 2.5% y/y through September. This was helped by a seasonally adjusted fall of 2.8% from August-September 2019.
Toys: Kids are in luck this year, with pricing for toys down 6.0% y/y in September. Pricing here was mostly flat from July through September, but it also dropped by a seasonally-adjusted 1.5% from June-July 2019.
Other appliances: Excluding major appliances, “other appliances” like for the kitchen are popular holiday gifts. They are more expensive this year, however, with prices here up 1.7% y/y in September.
Computers, peripherals and smart home devices: Prices for these types of tech items were down 3.3% y/y in September. Measuring prices for technology is not as a clear cut as other goods, as part of its fall in pricing is due to hedonic quality adjustments.
That’s why the CPI data says annual price changes for televisions were down as much as 19.4% in September, for example. Even still, when looking at a Consumer Report for Black Friday TV deals last year, a 49-Inch LG 4K UHD Smart TV went for $330 at Target in November 2018 versus $299.99 at Best Buy currently. Or a 55-Inch Samsung 4K UHD Smart TV that was selling for $399 at Walmart last year now costs $380 at Best Buy. Those are just a couple of examples, but shows the overall direction of pricing is likely correct.
Telephone hardware and other consumer info items: This category was down 13.9% y/y in September, again, likely due in large part to hedonic quality adjustments.
Average of categories: Down 3.0% y/y. Excluding the outlier drop for telephone hardware and other consumer info items, it’s down 1.4%.
While the US started imposing tariffs on Chinese imports on September 1st – affecting everything from footwear and smart watches to dishwashers and flat-panel televisions – there has since been some tariff delays and the yuan has weakened which may help mitigate the trade war’s impact.
Overall, our exercise of examining commonly holiday gifted items in the CPI does not suggest the US consumer should face meaningful inflation when shopping over the next couple of months as opposed to last year. While tariffs target apparel, inflation here is mixed by gender and not significant. If anything, prices for major gift categories from toys and jewelry to computers and smart home devices are flat to down. Sales should also start kicking into full force in November as it gets closer to Black Friday.
Bottom line: President Trump will likely want to keep consumer confidence high throughout the holiday shopping season to continue to support the US economy, so foregoing the December 15th increase in tariffs would make sense. Barring a trade shock, it should be another productive festive season.