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Will Lower Gas Prices Fuel Holiday Gift Purchases?

For the first time in nearly four years, holiday shoppers will receive the gift of lower costs at the pumps. The average price of gasoline has dropped below $3 a gallon, down from this year’s peak of nearly $3.40 in April. Due to a record boom in domestic oil production and a global crude oil glut, lower prices will mean higher disposable income for consumers and, potentially, increased holiday spending.

In a statement on the AAA website last month, spokesman Michael Green wrote, “For every penny that the national [gas price] average falls, more than one billion dollars per year in additional consumer spending is estimated to be freed up.”  The biggest declines in fuel costs have occurred on the West Coast according to Patrick DeHaan, analyst for GasBuddy Organization, Inc. In California, which typically has the highest retail prices in the continental U.S., fuel is cheaper on average than in New York. DeHaan said, “The West Coast is usually not invited to the party that we are in the rest of the country. But they’re joining in on this one.”

For retailers, this would certainly make the season brighter. However, there are differing opinions as to the likelihood of this scenario.

The National Retail Federation (NRF) said in October that it expects holiday sales to increase this year by 4 percent to $617 billion, up one percentage point from last year (and the first gain of over 4 percent in three years). However, a separate report issued by PricewaterhouseCoopers found that projected average household spending is expected to decline this year. The two firms agree that higher sales predictions don’t necessarily mean consumers won’t be cautious when opening their wallets. NRF President and CEO Matthew Shay said, “While expectations for sales growth are upbeat, it goes without saying that there still remains some uneasiness and anxiety among consumers when it comes to their purchase decisions.”

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Chris Christopher, an economist for the global analytics company IHS, commented in a video on the company website, “This year we have lower pump prices, and that helps consumers spend more and feel a little bit better.” Deloitte’s 2014 Holiday Shopping Survey (an online survey which polled a sample of 5000 consumers this September) reported that fewer respondents believe our country is still in a recession, and more than half of those polled believe the economy is slowly recovering.

According to the report, this increase in confidence is resulting in consumers expecting to spend 13 percent more on holiday gift purchases. This may be reflected in this month’s sales reports by companies like Michael Kors, Kate Spade and L Brand, but doesn’t seem to be supported by specialty apparel store results.

Gap said its October comparable-store sales were down 3 percent and its third-quarter sales (for stores open at least a year) fell by 2 percent. Abercrombie & Fitch also reported that third-quarter sales came in below expectations, and J.C. Penney released third quarter results this week which showed flat sales comps (compared to gains in the prior three quarters) and slower store traffic.

Notwithstanding such lackluster performance, there are those that are bullish with respect to the consumer spending outlook. In an interview on CNBC (aired Nov. 6), Jan Kniffin, CEO of the equity research and consulting firm J. Rogers Kniffin Worldwide, expressed optimism. “There will probably be $50 billion more in consumer pockets in the fourth quarter due to lower gasoline prices,” he said, adding that consumer confidence is strong and unemployment claims are down. But will the additional disposable income be put toward gift purchases?

According to the Deloitte report, shoppers are recognizing the importance of holiday experiences just as much, if not more, than gifts. When asked how much they expect to spend on various categories, those surveyed predicted the most growth in in-home entertainment purchases (compared to a 9 percent increase in gift purchases).