Andrew Pyle
November 25, 2022
Is Black Friday going to make for a green or red Monday?
First and foremost, we would like to wish our American family and friends a very Happy Thanksgiving and, as I mentioned on our conference call this week (playback details can be found at the end of the commentary), it is truly amazing how fast this weekend has crept up on us. In addition to turkey gobbling and football, this time of the year is also when we take the pulse of the consumer and evaluate whether the coming holiday shopping season is going to be cheerful or dreadful. In particular, how healthy will Black Friday sales be and how will the market interpret the results?
The dynamics this year are a little more complicated given that we are operating in an environment where so-so economic news has been treated as a positive for both equities and bonds, given that any signs of cooling is now being interpreted as a sign that the Federal Reserve can cool it on rate hikes. This weekend is also going to be more closely watched than usual given the negative guidance on holiday sales that has come from a number of large retailers, such as Target.
There are a number of indicators we can go to figure out how the consumer is behaving or likely to behave. Things consumer confidence indices and employment data can give insights into the willingness or ability to spend this season, but if we want hard data that is going to show up in the major economic reports like real GDP, then we have to go to the retail sales releases. The problem is that the advance monthly retail sales report only comes out around the middle of the next month. This is also a bit of a problem for the Federal Reserve as the November retail sales release is on December 15th – one day after the last FOMC meeting of the year.
One way around this is to look at higher frequency data and one such report is the Johnson Redbook Index, which is a metric of US sales based on 9,000 large retailers. The index can be used to calculate monthly movements, like the US Census Bureau advanced retail sales report, or we can look at movements in monthly sales. The most common use of the data is in looking year-over-year growth in sales for each week ending Saturday. As this encompasses Friday sales, it is very useful for this weekend as the report will be released on Monday.
Going back to 1996, when the series started, I looked at only those weeks where we had Black Friday and found that the worst week showed a year-over-year decline of 0.4% and the best week was a monster 21.9% gain. The average over the years is 4.9%. Note, that record high took place last year when the pandemic rebound in incomes and consumer sentiment led to a massive surge in spending. You might think that sales growth would show a material pullback one year later and you would be right, however, it’s not like growth is anemic.
As the chart shows, year-over-year sales growth has dropped to 7.5% as of last week, but this is still on par some of the best weeks seen before the pandemic and is close to 3 points above the long-term average. And given the pattern of sales over the past several weeks, there is little danger of growth turning negative anytime soon. Note, even though annual growth in Redbook sales remained above 20% in December last year, actual monthly retail sales saw a 1.6% dip from November. Last month, retail sales advanced by 1.2% from a sluggish September so we would have to see an extremely sharp negative turn starting this weekend to get a bad December. I expect that the Johnson Redbook headline Monday is going to show growth of at least 6.5% and maybe as high as 8%.
What else should we be looking at for clues about the American consumer this holiday season? Well, the November payrolls report next Friday will be important, though economists expect the headline increase to come in around 200K. Jobless claims have been rising since the end of September and the October household survey came in weak, so there is a good chance that next week’s headline will be weaker than expected.
And the gloom crew will point to the fact that the US personal savings rate (savings as a percentage of personal disposable income) has tumbled to just above 3% - the lowest since 2008. To say this is a significant drawdown in savings from the heights of the pandemic would the understatement of the year and with less cash in their pockets, there is naturally less ability to spend. That said, $580 billion in savings isn’t nothing and it is being augmented by borrowing.
Total consumer credit reached $4.7 trillion in September and has been growing at above a $20 billion per month pace since January. Growth has faded from the first half though, as consumers respond to higher borrowing costs. And it would stand to reason that there won’t be a rush to add even more to credit card balances this holiday season. Where we would start to get nervous is when monthly consumer credit growth begins to turn negative, since this typically would be at the start of a recession. Prior to the financial crisis, monthly consumer credit took about a year from the peak monthly growth to where we started to see retrenchment. If we follow the same pattern this time around, that would mean negative credit growth by the end of the first quarter.
So, while we may not see disastrous news on the consumer this Monday, the outlook into 2023 isn’t looking great. Much will depend on the state of labour market and personal incomes, not to mention the decision of the Federal Reserve next month. All of the above would support a shift to a less aggressive policy stance, though some would argue it supports an absolute halt to rate hikes. The problem for the equity market is that they have already lowered the bar in expecting only a half-point move. If next Friday’s employment stats are weak, they might move the bard down to a quarter point and this sets the market up for a negative surprise if Jay Powell and crew stick to half a point. Whether you think there is a risk of that happening or simply begin to do the math on the economy in the first half, stocks are looking a little expensive.
On behalf of the Pyle Group, have a wonderful weekend.
Andrew Pyle
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