Trying To Reason With The Holiday Season

In North America, the consumer is 65-70% of the economy. So we all watch to see what the consumer mood is at this time of year to get a sense of what retail selling will bring to the economic landscape. In the US, the consumer will spend about 1/4 of their annual retail purchases over the course of the next month.

The traditional "Black Friday" data has been watered down in recent years with the advance of "on-line" shopping, so the early signals of consumer spending are not as easy to read. Needless to say, there are lots of analysts watching closely.

From the Wall Street Journal : "analysts see robust holiday sales, underpinned by rising wages, low unemployment and strong consumer confidence". Black Friday sales were expected to grow by close to 5% over last year, but that is only the third busiest shopping day. Now "Cyber Monday"  and the Saturday before Christmas are the top two shopping days.

Lots of optimism has been built into the current scenario and Amazon stock has hit new highs:

If shoppers are spending more, where is it coming from?

Wage growth in the US has stalled (and has not returned to pre-financial crisis levels):

And as we suggested on last weeks weekly video, US consumer debt levels are pushing to record highs:

We haven't seen the Q3 Canadian Household Debt to income data yet (due in mid-December), but the Q2 numbers showed debt levels rising while income levels were falling.

What this tells us is that spending may be helping economic growth in the near-term, but it may also be veiling a growing potential problem with consumer debt levels.

If the US Federal Reserve raises rates in December (mid holiday season) as they are expected to do, debt servicing costs are going to start to rise and cut into consumer spending power. The greater the debt burden, without wage growth, the less the consumer will have at their disposal for discretionary spending.

If 2/3 of the economic power becomes burdened in this manner, the medium term economic prospects are going to start to look a little more grim.

Our job is not to get caught up in the moment (the hype), but to try to see what is out there on the horizon.

Enjoy the holiday season, the New Year may bring some surprises.