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Upbeat Holiday Forecasts Clash With ‘Downbeat’ Consumer Sentiment: Week Ahead

Consumers don’t appear to be in a shopping mood, despite August’s U.S. retail sales uptick and a strong holiday outlook.

While the steep August falloff in consumer sentiment ended in September, the modest improvement indicates that consumers don’t exactly have high hopes for a significant economic rebound, according to data from the University of Michigan’s Surveys of Consumers on Friday. A final report for September’s consumer sentiment is due on Oct. 1.

The August reading saw the Index rise to 71.0 from last month’s 70.3 reading, but it was still below the 80.4 reading in September 2020. The read on current economic conditions slipped to 77.1 from last month’s 78.5, versus September’s year-ago level of 87.8. In addition, while the expectations component rose slightly to 67.1 from 65.1, that too was below the reading of 75.6 from September 2020. Essentially, all signs point to possibly slower growth in consumer spending.

The survey suggests that “consumers are more downbeat today than when the pandemic first struck last year,” Wells Fargo Securities economists said, describing September’s modest gain as a “worrying indication for the outlook for the consumer.” While expectations inched up, perceptions of current conditions slipped to the lowest level since April 2020, they added.

“Higher prices seem most to blame for the weaker read on sentiment, but we suspect dwindling stimulus and the delayed return to some semblance of normal life due to the rise in the Delta variant is also weighing on the moods of consumers,” the economists said.

While some analysts point to the resiliency of the consumer following Thursday’s report that U.S. retail sales rose 0.7 percent last month after July’s decline, the Wells Fargo economists believe the University of Michigan’s “gloomy read on sentiment still suggests some weakness in third quarter spending.”

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Headlining the concern for spending has been the deterioration in consumer appetite for big ticket purchases, such as major household items, vehicles and homes. Buying intentions fell 10 points in September on top of an eight-point drop in August, the economists said.

But that’s not necessarily bad news for apparel, considered the go-to category for gift giving, especially cold weather wearables when coupled with some planned promotions as holiday specials. And even though consumers have already faced a bit of sticker shock on many items at the stores, many households have saved money during quarantine that they would have spent dining out and doing other discretionary activities.

“A steady decline in the savings rate to pre-pandemic levels will support consumer spending and keep retail sales elevated this season,” Daniel Bachman, Deloitte’s U.S. economic forecaster, said. Deloitte expects holiday retail sales to increase between 7 percent and 9 percent this year, totaling 1.28 trillion to$1.3 trillion during the November to January timeframe. In addition, the consulting firm forecasts that  e-commerce sales will grow 11 percent to 15 percent, year-over-year, with holiday sales in the channel reaching between $210 billion and $218 billion.

On Friday, global consulting firm AlixPartners said it expects holiday retail sales this year to rise between 10 percent to 13 percent, which would make 2021 “the strongest holiday period since 1999.”

While retailers still face some challenges, such as supply-chain disruptions and higher delivery costs, those that can optimize inventory across stores and distribution centers will be better able to navigate whatever surprises are thrown their way.

“Our message to retailers is: ‘This holiday season is yours to lose,'” said Joel Bines, global co-leader of the retail practice at AlixPartners. “There’s unprecedented pent-up demand out there, consumers have lots of money in their pockets, in part due to recent government programs, and even the rise of the Delta variant, while certainly concerning, doesn’t seem poised to put a damper on things, thanks in part to the big increases in online shopping this past year.”

Walter Loeb, a former retail executive and retail analyst, believes that retailers will start a “protracted promotional period for Christmas” by the end of October so consumers know to buy before inventory runs out.

While Loeb isn’t exactly a naysayer regarding the optimistic holiday sales projections, he’s cautious given the economic environment.

Loeb believes inflation-wary consumers might start to curtail spending. A recent University of Michigan consumer sentiment survey supports this position, along with the Conference Board’s Consumer Confidence Index, which dipped 11.3 points and indicates consumer concern over rising food and gas prices.

The stock market might be in for a 10 to 20 percent correction, potentially leaving consumers “shell-shocked,” Loeb said, and sparking worry about home values, jobs and their personal cash flow. Because stock markets routinely correct when valuations get too high, it’s not a question of if it will happen but when and by how much.

President Biden’s vaccine mandate is also pressuring the consumer psyche, and could spur some workers to leave their jobs and exacerbate the labor shortage. That’s on top of any unemployment increases. On Thursday, the Labor Department said first-time filers for unemployment benefits last week rose to 332,000. The increase, possibly tied to layoffs in Hurricane Ida’s aftermath, is still near a pandemic low.

Plus, rising Covid cases, increasing unemployment claims and a stock market downturn could create a perfect storm where many consumers have little choice but to tighten their purse strings, Loeb noted. If that comes to pass, there’s a decent chance 2021 could see just a 2 percent to 3 percent gain for the holiday selling season, he added.