Retailers are banking on a stellar holiday shopping season. “Holiday spending has the potential to shatter previous records,” the National Retail Federation exclaimed, as it predicted November and December retail sales will grow between 8.5% and 10.5% over 2020.
Sensing growing consumer momentum for a return to normal holiday celebrations, NRF President and CEO Matthew Shay said, “Consumers are in a very favorable position going into the last few months of the year as income is rising and household balance sheets have never been stronger.”
Trouble is he didn’t get the latest memo from the Bureau of Economic Analysis which reported that personal income actually dropped by 1% in September.
This followed more troubling news from the Census Bureau that American median household income declined 2.9% in 2020, the second-highest level in the last 40 years. Note: The NRF did not respond to a request for comment.
Only three times since 1980 have median household incomes dropped by so much, in 1991 when it dipped 2.9% and in 2008 down 3.6%. And after those last two times, it took years for the median income to dig out of the hole.
Blip or longer-term trend?
One can argue that the household income decline was simply the effect of the pandemic and household incomes will right themselves in no time. Or that the personal income data as tracked by BEA is a better measure of how well off Americans are. But since the beginning of 2020, that’s been a bumpy line, complicated by government stimulus payments that cause a spike in the macro-income number one month only to see a drop the next.
Associate Dean and Founding Program Director, MS in Applied Economics at Boston College, Aleksander Tomic Ph.D. leans toward a quick income recovery. “It’s different this time than in previous recessions. The economy’s rebound has been considerably stronger and faster than before,” he says.
Adjunct economics professor John Rosen at the University of New Haven is more cautious. He foresees a period of slow or stagnant income growth through 2022, given the churn in employment, people dropping out of the workforce and more part-time and gig economy workers.
“Nobody really knows, which is why you can find a forecast for anything,” he quips.
Inflation is the wildcard
But on two things both economists agree. We are in for an extended period of inflation and people’s paychecks are not likely to keep up.
“Inflation and income, you can’t disassociate the two. Regardless of what happens to income in nominal terms, real income [adjusted for inflation] will drop,” says Tomic.
Now that inflation topped 6.2% in October –a level not seen since 1990 – both economists expect inflation to take a bigger and bigger bite out of consumers’ wallets, no matter which way their incomes go.
“Inflation is insidious,” Rosen adds. “You become like a gerbil, running faster and faster only to fall further and further behind. I expect to see inflation lasting longer than anyone is prepared for. And we are going to see the lower-income brackets have greater reductions in their income than the higher-income brackets. In this scenario, it’s the most vulnerable who get screwed. The rich take care of themselves.”
The strong retail spending we’ve seen this year has been a result of many factors, including stimulus payments and spending that shifted from doing things to buying more stuff.
Because consumers have an overwhelming desire to get their lives back to normal, they are likely to meet NRF’s strong holiday spending forecast, but after that, the other shoe may drop.
Winter of Discontent
Americans are headed into a cold dark winter, especially as the cost for energy to heat their homes is up sharply. Fuel oil is up 59.1% from a year ago and gas service up 28.1%. And if this winter is just 10% colder than average, the Energy Information Administration predicts the cost to heat with natural gas will rise 50% and it will go up by 59% for homes that heat with oil.
And many may be forced to stay in their cold homes since the cost of gasoline has risen 49.6%. During his tenure as president and CEO of Walmart U.S., Bill Simon said the price of gasoline was one of his company’s key-performance-indicators (KPI) because as gas prices rise, its customers shopped less.
With all the worries that retailers face this holiday – having enough supply of in-demand products and enough workers to effectively service their customers – they need to add the question of whether their customers will have sufficient spending power to meet revenue and profit goals next year.
Retailers will get their test once people receive their first heating bill of the season.
The Devil in the Details
While the BEA gives a month-by-month running tally of personal incomes at the macro level, only the Census Bureau breaks it down at the household level. This is where the proverbial rubber meets the road when it comes to spending.
Across the demographic divide, the decline in household incomes hit most all in 2020. Even those in the top five percent quintile (>$274k annual income) experienced a 1.1% drop in average income. But those in the lowest (<$27k) and second lowest quintile (<$52k) dropped most, 4.6% and 2.9% respectively. Note: the Census Bureau doesn’t report median income by percentile, only average.
Here’s a look at how the different demographic segments fared according to the median income data:
- By household composition – The hardest hit households were those headed by men: family households headed by men with no spouse present, down 4%, and nonfamily households headed by males, down 3.8%. Typically married-couple family households have the highest incomes but they didn’t escape the downward pressure, dropping 2%, while the lower-earning nonfamily households dropped even more, down 3.1%. The lone exception were households headed by women, either family or nonfamily, which saw a modest increase.
- By ethnicity – All declined with the exception of black households which remained level, despite having the lowest overall median income ($45,870). On the other hand, the highest-income Asian household ($94,903) experienced the steepest drop, down 4.5%. White non-Hispanic households dropped 2.7% and Hispanic dropped 2.6%.
- By age – Senior households made out worse than those under 65 years, declining 3.3%, compared with a 2.6% drop among those under 65 years. However, seniors weren’t the hardest hit. Those aged 35-to-44 years were, down 4.8%. Only households aged 25-to-34 years held steady.
In addition, foreign-born householders experienced a steeper decline than native-born, -5.7% compared with –2.2%. Households in the Midwest region declined most (-3,2%), but those in the Northeast, South and West also dropped by more than 2%.
City-dwellers (-3.2%) did worse than those outside urban areas (-2.1%) and the less educated (-5.7% for no high school diploma and -3.9 for high-school, no college) dropped more sharply than those with some college or a Bachelor’s degree or higher (both -2.8%).
On an individual basis, the Census Bureau reported the number of all workers declined by 1.7% in 2020, but the number of full-time year-round workers dropped precipitously, down 11.5%.
Not unexpectedly, given the decline in incomes, the poverty rate grew in 2020 to 11.4% up from 10.5% in 2019. The Census Department notes that was the first rise in the poverty levels after five consecutive years of declines.
From Bad to Worse
Without a crystal ball, it is hard to predict how these two critical factors – rising inflation coupled with declining or stagnating household incomes – will play out. But it would appear to be a lethal combination for the prospects of the retail industry, if not this holiday season, in the coming years.
“You cannot ignore inflation when talking about consumer spending,” economist Tomic says. “You get a false picture unless household income grows faster than inflation. In real terms, the big problem will be inflation. That is the biggest question.”
This holiday season, the hope for retailers is that consumer confidence that bounced back in October after three months of decline will remain positive. Given that Americans are optimistic by nature, their confidence over the next two months is likely to hold.
As Karl Haller, leader of IBM’s Consumer Center of Competency, says, “Consumers are generally not good at thinking two or three moves ahead. It’s hard to bet against the U.S. consumer continuing to spend.”
But that said, we may be rapidly reaching a tipping point where they hit a wall. No matter how personally confident they feel and how much they want to spend in retail, the pocketbook reality may require they take a break.
They’ve got to get to work – assuming they have a job – to put food on the table and keep the figurative home fires burning. And all of that is going to cost more, not just over the next few months, but conceivably over the next few years.