A Looming Holiday Headache…Times Three

Slowing housing market, weak job growth, and soaring gas prices may cause problems for retailers.

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The holiday shopping season is upon us. Holiday inspired jingles have been filling the airwaves since September, and Thanksgiving—or more accurately the shopping bonanza on the day after—is only a week away.

Late November typically kicks off the largest shopping spree of the year. November and December retail sales generally increase sharply compared with the prior months. Yet consumers’ enthusiasm for shopping seems to have waned over the past two years; the gains in November were lower in 2006 than in 2005 and by some measures lower in 2005 than in 2004.

Last year consumers faced only one headache, the housing market slowdown. This year they also have to contend with rising gasoline prices and much slower job growth. Consumers’ additional worries could translate into slower holiday sales growth this year compared with 2006.

Census data show a deceleration in the retail sales growth from 2005 to 2006. Inflation-adjusted retail sales rose by 3.3 percent from October 2006 to November 2006 without correcting for typical seasonal swings. The growth rate during that same period of 2005 was 3.6 percent. Sales growth in November 2006 accelerated less from its Ocotber 2006 levels than happened at the same time in 2005, 2.4 percentage points compared with 3.1 percentage points. 

There is an even longer deceleration when comparing November to November. The sales in November 2006 were 2.6 percent higher than sales in November 2005. Retail sales in November 2005 were 3.1 percent greater than those in November 2004. And sales in 2004 had grown 4.6 percent compared with those in November 2003. Although this shows an increase in sales, the rate of year-over-year gains slowed for the past two years after inflation is accounted for.

The housing market is not the only potentially damaging factor threatening consumers and the economy at large this year. Weak job growth and nearly record-high gasoline prices are also ominously present this November.

A similar picture of deceleration emerges when we look at retail sales and food service sales together. These combined sales grew by 2.4 percent in November 2006, down from 2.7 percent in November 2005. Again, the November 2006 increase over October 2006 sales was slower than the same increase in the previous year: 1.4 percentage points compared with 2.0 percentage points. And the year-over-year growth rate for November 2006 was 2.8 percent, down from 3.2 percent a year earlier and 4.2 percent two years prior. Retailers have seen increasingly fewer gains in November in the past two years.

The same deceleration shows up after data are adjusted for typical seasonal swings in sales, which spells trouble for economic growth. Seasonally adjusted retail sales increased 0.4 percent in November 2006, down from 1.1 percent in November 2005. November 2005 sales growth was 0.9 percentage points faster than October 2005, while the comparable increase in 2006 was only 0.2 percentage points, reflecting a much slower growing economy. And retail sales were 2.3 percent greater in November 2006 than in November 2005, which had grown 3.0 percent a year earlier, showing that the slowdown was more than just a one-month anomaly.

To round out the picture of the slowing consumer-driven economy, combined retail and food service sales also show slower growth in seasonally adjusted data. In November 2006, combined sales rose 0.3 percent in inflation adjusted terms, down from 1.1 percent a year earlier. And combined sales in November 2006 were 2.5 percent greater than in November 2004, down from a 3.1 percent increase over the previous year. Since consumers carried this economy forward for much of the business cycle, which started in March 2001, the slowdown in retail sales ultimately rang in slower economic growth in 2007.

Last year’s deceleration in retail sales was somewhat surprising given that both consumer credit and disposable income accelerated during at the same time. Inflation adjusted consumer credit—outside of mortgages—grew 2.6 percent from November 2005 to November 2006, up from an increase of 1.4 percent in the previous 12 months. Credit card debt showed an even faster acceleration with 4.3 percent growth between November 2005 and November 2006, up from 1.0 percent growth in the preceding 12 months.

Inflation adjusted disposable income also rose by 0.8 percent between November 2005 and November 2006 after falling by 0.2 percent in the year before. Faster growth of both debt and income should have translated into accelerated retail sales, since it seems that on the face of it consumers’ financial resources had increased faster.

The discrepancy between a slowdown in retail sales growth and financial resource growth increases is probably best explained by the concurrent slowdown in the housing and mortgage market. In fact, new housing sales were 18.6 percent lower in November 2006 than in November 2005. Slower sales and less appreciation meant that fewer households had access to home equity that they could cash out to fuel consumption.

This is worrisome since the housing and mortgage slowdown has continued since November 2006. New housing sales in September 2007, the last month for which data are available, were 22.0 percent lower than in November 2006. At the same time, price increases in the housing market slowed further, again reducing homeowners’ ability to tap into their equity.

The housing market is not the only potentially damaging factor threatening consumers and the economy at large this year. Weak job growth and nearly record-high gasoline prices are also ominously present this November.

The job market has markedly slowed. Between October 2006 and October 2007, monthly job growth averaged just 139,700 jobs compared to 199,500 in the preceding 12 months. The 59,800 job growth difference between the two periods only adds to the growing cloud being placed over the U.S. economy and slowing U.S. consumers.

Prices at the gas pump were part of a summertime consumer spending story in the previous few years. Yet this year gas prices are poised to break through more than 20-year-old records. According to the Energy Information Administration’s latest data, the price of regular gasoline is $3.111 per gallon, up from $2.315 in inflation adjusted terms over the same time last year—a 34.3 percent increase. Gas prices are currently just $0.077 shy of the 2007 monthly high set in May, which itself was the highest average in inflation adjusted terms since June of 1981.

While we cannot predict the future, the economy in November 2007 should give consumers plenty of reasons to keep the purse strings tight during this holiday shopping spree. Without significantly higher wages or sharply higher consumer debt, the slowdown in the housing market, the lackluster labor market, and the rising gas prices could put a serious damper on retail sales and economic growth.

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