Why Consumers Are Spending More Than They're Earning This Holiday Season

Black Friday smashed records, but with slowing income growth, where's the money coming from? Uncover the hidden dynamics of holiday spending.

Don’t worry… about a thing. How are you doing? I am sorry to say that I did not hit the retail scene over this past weekend. In fact, I kept myself so busy with work and what not, that I completely missed the post-Thanksgiving transition. Was there even a transition? There used to be unwritten holiday rules which were strictly observed by all. No white clothes after Labor Day. White Bucks and Seersucker only on or after Easter (this obviously only applies to me), Halloween candy is only to be consumed in the month of October. Thanksgiving vibes only in November. Christmas and holiday vibes only on or after Black Friday. Now, we all know that most of these have been completely disobeyed in recent years. We have retailers to thank for that. Ever eager to get a jump on the season, we start to see the decorations and sales come out far before the unwritten rules period, so much so that it appears as if all holidays are bleeding into each other making life one big spending party.

Yesterday morning, I was fortunate to be on the floor of the iconic New York Stock Exchange for a live interview. Long story short, it was awesome, and I will post the links to the video online later today. But that is not the story. The story is about the lobby. That’s right, the main lobby of the exchange. It is a sleek room with lots of historic marble, filled with displays from the many iconic member companies listed on the NYSE. Of course, there is an old Edison Stock Ticker with the paper tape still threaded through its gears. In the center is a beautiful Steinway baby grand piano begging to be played. But not this time, no. In the background was playing a loop of all those iconic Christmas songs. It was, indeed, my first reminder that the holiday season was upon us. Thankfully, the unwritten rule about playing holiday songs only after Thanksgiving is still being honored.

So, how ARE you doing? Are you better off this year than last? Well, if we use online black Friday spending as an indicator, you are better off. Better off by some $10.8 billion according to Adobe Analytics. That is almost a 10% increase over last year! Are you making more money this year? Maybe, but at least 10% more? Well, according to the latest data from the Bureau of Economic Analysis (BEA), your inflation adjusted disposable income rose by 2.7% over the past year (technically October through October). But still, we spent 10% more! Now, I know that this not at all a pure comparison. Of course, this includes the ongoing shift to online, and of course, this is only a small portion of what we spend our money on, however, there must be something driving the increase. Oh, and by the way, according to Mastercard, we spent around 3.4% more overall (including in-store retail) on Black Friday, still more than the 2.7% more than we earned. That is in line with the latest Retail Sales data from the US Census Bureau which showed a 3.6% increase excluding food service, gas, building materials, and motor vehicles.

Let’s take a step back and see if we can find come clues. The S&P500, notched its 54^th record close of the year yesterday.😅 That can have something to do with it. You see, that Personal Income figure I listed above includes income from investments, NOT CAPITAL GAINS from investments. But, based on the market’s behavior, it doesn’t look like you have been selling your profitable positions to buy your bestie a cashmere sweater for the holiday. My regular readers know that I often refer to the Wealth Effect when it comes to consumer confidence. When the stock market is on the rise, all consumers are more confident… even if they don’t own stocks. I won’t get into the psychology around that, but I am sure that you can understand why. Hmm, maybe we are onto something. Are you sensing that I am about to drop a heavy chart on you? If so, you are correct. Have a look and follow me to the close.

First, ignore all the misaligned axes. This chart is meant to show you a high-level, directional relationship between personal income (white line), personal consumption expenditures (blue line), and consumer confidence (orange line). The first thing that I hope you notice is that income growth has slowed significantly over the past year. It is still growing, but at a slower pace. Hmm. With that you should also note that consumption growth is also slowing. That should concern you a bit given that consumption is 2/3 of GDP. Finally, we can see that consumer confidence has not only trended higher since the summer, but it is also higher than it was last year at this time. Aha, consumer confidence! You are more confident, so you are spending more money! Ok, but that still doesn't explain how our spending growth can outpace our income growth. I am just going to end this by giving you a bonus chart (Outstanding Consumer Credit). Happy Holidays, and yes, I had to keep myself from humming those Christmas tunes once they turned on my mic for the interview.

YESTERDAY’S MARKETS

Stocks had a mixed close yesterday as traders came back to the market with a hunger for growth as we entered the final month with high hopes for a Santa Claus rally. Fed speakers are still committed to lowering interest rates, but they are keeping their near-term plans close to the vest. The Nasdaq Composite and the S&P500 both finished the session at all-time highs.

NEXT UP

• JOLTS Job Openings (October) are expected to have increased slightly to 7.519 million from 7.443 million vacancies.
• Fed speakers today: Daly, Kugler, and Goolsbee. Fed Funds Futures are predicting a 72% of a 25 basis-point cut later this month.
• After the closing bell earnings: Okta, Salesforce, and Marvell Technology.

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