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It’s Not Too Soon to Think About Holiday—and the Early Read Isn’t Good

The coronavirus isn’t just ravaging the health of many Americans who get infected, it’s also having an effect on the consumer psyche. And now, how the holiday season shapes up could hinge on consumer confidence and the trajectory of shoppers’ spending patterns in the months ahead.

What’s more, the longer the coronavirus pandemic disrupts life in general, the greater the likelihood new consumer behavioral patterns will shift as they adapt to a new normal.

Even though some state governors are eager to scale back lockdown restrictions, there are other parts of the country where shelter-in-place rules will remain in effect for the foreseeable future. And, depending on progression of COVID-19 in the weeks to come, those rules could end up staying in place through part of June and potentially into July.

The early read: low confidence for spring and summer spending

A Cowen & Co. bi-monthly consumer tracker indicated that 52 million Americans are concerned their job is at risk, up from 46 million at the end of March, per a survey conducted from April 13-17.  That, in turn, has translated to muted consumer spending intentions, particularly for those recently laid off. The tracker also shows that 44 percent of the 2,500 who were surveyed expect to spend the same amount over the next month versus the prior month, with 34 percent expecting to spend less.

Looking ahead, 53 percent said they expect to spend less this spring and upcoming summer. Apparel and accessories are set to take a significant hit, as 42 percent intend to prune their spending in these categories.

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A stimulus check that was part of the federal government’s CARES Act to help boost spending won’t do much to help small business owners. The tracker found that 74 percent of respondents expect to receive stimulus checks, with those earmarking the payment for savings at 31 percent; groceries, 19 percent; paying down debt, 18 percent,  and paying mortgage or rent, 11 percent.

More important, respondents weren’t too confident about returning to retail stores when they are “officially reopened.” While retail stores scored the highest, just 5.8 percent of those surveyed said they would feel safe returning to stores, where social distancing can be difficult. Most of the respondents expect the coronavirus to be disruptive to their lives for another 5.1 months, up from 4 months two weeks ago in the last survey.

Trade-down effect at work as discretionary cash flow declines

The consumer and retail research teams at Goldman Sachs are expecting consumer discretionary cash flow growth to decline “significantly,” at about 5.9 percent, in 2020. Much of their concern is due to high levels of unemployment, which Goldman projects will hit 15 percent this summer from 3.5 percent at the start of 2020. And last Thursday, the U.S. Labor Department said 5.245 million Americans filed for first-time unemployment benefits for the week ended April 11, bringing the four-week total in job losses to over 22 million.

“Our economists expect the consumers to drawdown their savings [this year] to make up for the loss of income,” Jason English, equity analyst at Goldman, said.

Typically, consumers raise their savings rate when net worth falls, but this time around Goldman economists are forecasting a drop in the savings rate this year. The good news is that the economists are predicting a sharp recovery–but not until 2021. That would also raise discretionary cash flow, but again not until 2021.

With the spending outlook grim for consumers in 2020, the analysts at Goldman raise two concerns that remain unanswered: duration and magnitude of the current coronavirus outbreak, and how quickly a recovery will take hold in 2021.

The Goldman analysts also expect the new at-home economy will translate into a trade-down economy as U.S. consumers face a high degree of fiscal duress even after shelter-at-home restrictions ease and despite government stimulus measures.

“As such, we expect the consumer to exhibit spending restraint out of both caution and need. As a result, price-value is likely to rise in terms of consumer priority and discretionary purchases are likely to be deferred in lieu of essential needs,” English said.

That trade-down effect will also see a shift from prestige and luxury products to their mass counterparts, just as new car sales will likely lag used auto sales and leases and luxury hotels will trail budget accommodations. That means sales of aspirational merchandise will shift to the practical, while consumers can also trade out of branded goods to cheaper, private-label options.

Consumers get used to shopping online

One in five say it will take six months or more from now before their spending returns to normal levels, according to Deborah Weinswig, CEO of Coresight Research. In a consumer sentiment survey, nearly one-quarter expect the impact from the outbreak to last more than six months, a time frame with significant implications for the holiday shopping season.

While some shoppers are returning to discretionary categories even in small amounts, they are outweighed by those cutting their spending. Since the start of the U.S. outbreak, about 40 percent of consumers have reined in spending on apparel.

Consumers have become increasingly more concerned about the coronavirus for each additional week that the outbreak and lockdowns continue.

One in seven has lost their job, and those most impacted were between ages 18-44, while more than one-quarter remain concerned they will lose their employment or see reduced working hours.

And as the lockdowns drag on, a growing number–now 65.6 percent versus 47.4 percent at the start–say they expect to keep current changes they’ve made in their shopping behavior. That translates to consumers expecting they will continue to shop online instead of in stores, while one-quarter said they will shop less overall.