Consumers may face headwinds this holiday season

October 2024 – Consumers have shown some semblance of spending strength in recent months, but several factors may dampen their willingness to spend this holiday season. While inflation continues to abate, the price level of many holiday purchases—both goods and services—remains elevated compared to the past several years. The Conference Board’s Consumer Confidence Index has shown overall consumer confidence improving, but it has certainly not been strong enough throughout 2024 to portend a breakout in holiday spending.

Waning confidence in the labor market, both at present and (possibly more importantly) in the future may also push some consumers to curtail their holiday spending due to job loss concerns (refer to fig. 1 in full report). Additionally, while an increasing percentage of consumers expect their family financial situation to improve in the coming six months, those who see their present family financial situation as bad has also been increasing in recent months—nearly to the same level as consumers who see it as good.

In contrast with last year, we enter this holiday season with a softer labor market, rising unemployment and no pandemic savings cushion. While these developments paint a pessimistic picture, incomes continue to hold up. Average hourly earnings growth is still tracking faster than pre-pandemic levels, with growth accelerating in August compared to July. Consumer confidence, while not robust throughout 2024, has benefited from cooling inflation and falling gasoline prices. Recent retail sales trends are also encouraging, with holiday sales categories* up 0.3 percent in August from the previous month, and up 3.5 percent from August 2023. Our Discretionary Spending Momentum Index rose 4.8 points in August to 97.5 in another sign of spending growth in the months ahead (see fig. 2 in full report). Nonetheless, the primary engine that fuels holiday spending is growth in real disposable income, which has slowed considerably. In July, real incomes rose 1.1 percent year-over-year (YoY), compared to 4.4 percent YoY growth in July 2023.

With the backdrop of softer income growth and softening consumer confidence, we see holiday sales rising 3.0 percent YoY this season. If realized, this season could be slightly below the average during the last expansion (2010-2019) of 3.6 percent. Given the ongoing trend for a more elongated holiday shopping season, we have also estimated holiday sales including the month of October. Under this broader definition, we estimate holiday sales will rise 3.1 percent YoY this season, down from 3.8 percent in 2023. Last year, the nominally reported sales were lifted, in part by inflation pressures. This year, as inflation subsides, we expect more real (inflation-adjusted) consumer spending growth. The implication of the outlook is that foot traffic (real spending) should be stronger while prices continue to moderate. On net, this will likely weigh on holiday sales revenues (nominal spending) this season.

^* We define holiday sales as non-seasonally adjusted nominal retail sales on all forms of payment less sales at automotive dealers, gas stations and restaurants for the months of November and December as reported by the U.S. Department of Commerce.

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