Broker Check

Where’s The Money Coming From?

December 01, 2023

Shoppers kicked off the holiday season with a bang. A record 200 million people visited stores and searched websites from Thanksgiving Day through Cyber Monday1. That’s an all-time high, and it wasn’t just foot traffic. The total amount spent also broke records, increasing 7.5% from last year.

For the first time in two years, growth is coming from increased demand, not just higher prices2,6. The average consumer is expected to spend $1,652 on the holidays this year, a 14% increase from last year3.

No matter how the data is sliced and diced, Americans keep spending, and that’s surprised a lot of economists and investors who expected a weaker start to holiday shopping. In fact, given all the headwinds facing consumers, many are even asking where the money is coming from.

Three reasons likely explain this trend. First, the job market remains strong. Despite stories of layoffs, there are still 1.6 jobs for every person looking4. The unemployment rate is 3.9% and drops to 2.2% for workers with a bachelor’s degree or higher4.

Strong job markets lead to higher wages because employers must compete to keep talent. The chart below shows that wages are not only rising, but they’re doing so faster than inflation. Bigger paychecks make consumers more confident and loosen the purse strings.

Second, consumers are sitting on a lot of dry powder. The chart below shows that there is still an estimated $433 billion in excess savings remaining from the 2020-21 stimulus programs5. Although this has fallen since the peak in August 2021, it’s still close to half a trillion of additional cash in bank accounts waiting to be deployed.

Third, the chart below shows that the average credit card interest rate has exploded to an all-time high. This has fueled the popularity of creative financing options like “Buy Now, Pay Later” or BNPL, for short. BNPL lets buyers spread the purchase cost out rather than incur it all at once.  Some BNPL plans even offer 0% financing for several years. Retailers like BNPL because it’s cheaper than credit card fees and encourages more spending.

U.S. holiday shoppers spent an estimated $940 million using BNPL services on Cyber Monday, a staggering 43% increase from last year6. Shoppers who used a BNPL service spent $598 on average on Black Friday, versus $452 among those who didn’t use a deferred payment method7. From November 1st to the 27th, BNPL has driven $8.3 billion, up 17% year-over-year. November is expected to be the biggest month on record for the payment method6.


The bottom line

Consumer spending fuels close to 70% of the U.S. economy. That’s why this time of year matters so much to Wall Street, and while the data so far have been impressive, it’s not perfect. For starters, not everyone is spending more. Wealthy consumers spend the most because they have the most, and this year is no different. But other cohorts appear to be spending less on a relative basis.

Furthermore, the data also suggest that demand correlates more with the discount size rather than specific categories like apparel or electronics. Meaning, consumers are chasing the best deals more than popular discretionary items like Furbies and Beanie Babies.

Lastly, consumers may have used Black Friday and Cyber Monday more for delayed necessities and less for discretionary purchases than in the past. For example, if a dishwasher broke last summer, the owner may have waited until the holidays for a better price. If so, some of this spending may be robbing Peter to pay Paul.

Add it all up, and consumers have money to spend. Some trends, like a strong job market, are good, while others, like rising credit card default rates, are bad. But the net result is undoubtedly fueling economic growth. For example, the chart below shows that S&P 500 operating earnings per share are now on pace to set a new record high8. Much of this can be attributed to
consumer spending.

The bottom line is that investors should never underestimate the ability and willingness of Americans to spend money. This year may prove to be no different.


 



Sources

1 https://www.cnbc.com/2023/11/28/black-friday-weekend-shopping-turnout-soars-to-a-record.html#:~:text=On%20Black%20Friday%2C%20consumers%20spent,up%209.6%25%20year%20over%20year.

2 https://www.marketwatch.com/story/black-friday-online-spending-reaches-record-levels-but-wall-street-is-not-impressed-7655157e

3 https://www2.deloitte.com/content/dam/insights/articles/us176694_cic_holiday-retail-survey/DI_2023-Deloitte-holiday-retail-survey.pdf

4 https://www.bls.gov/emp/tables/unemployment-earnings-education.htm

5 https://www.frbsf.org/economic-research/indicators-data/pandemic-era-excess-savings/

6 https://news.adobe.com/news/news-details/2023/Media-Alert-Adobe-Cyber-Monday-Surges-to-12.4-Billion-in-Online-Spending-Breaking-E-Commerce-Record/default.aspx

7 https://www.investopedia.com/more-black-friday-shoppers-used-buy-now-pay-later-even-as-they-shunned-big-ticket-gifts-8406912

8 https://bilello.blog/2023/the-week-in-charts-11-20-20

 

Disclosures

This material has been prepared for informational purposes only and should not be construed as a solicitation to effect, or attempt to effect, either transactions in securities or the rendering of personalized investment advice. This material is not intended to provide, and should not be relied on for tax, legal, investment, accounting, or other financial advice. You should consult your own tax, legal, financial, and accounting advisors before engaging in any transaction. Asset allocation and diversification do not guarantee a profit or protect against a loss. All references to potential future developments or outcomes are strictly the views and opinions of Richard W. Paul & Associates and in no way promise, guarantee, or seek to predict with any certainty what may or may not occur in various economies and investment markets. Past performance is not necessarily indicative of future performance.