Consumer sentiment and solid fundamentals suggest an upbeat outlook among holiday shoppers.
As we head into the holiday season, an always-important period for retailers, our focus turns again to what drives consumer spending, which accounts for about 70 percent of real gross domestic product. Holiday shopping delivers as much as 40 percent of total annual sales and profit for some merchants. The strength of fourth-quarter consumer spending likely will play a critical role in sustaining economic growth as well as providing support for U.S. equity prices.
Over the past year, the U.S. economy has added more than 2.8 million new jobs, increasing payroll employment to 142.4 million and pushing the national jobless rate down to 5 percent. Even with this growth, 4.9 million jobs remain unfilled. In addition, wages are rising at roughly 2.5 percent annually. Job market strength has led to longer hours worked and pay increases. After analyzing employment report data on jobs, hours worked, and hourly wages, we estimate take-home pay gains at 4.6 percent on an annual basis, enough to sustain continued advances in consumer spending. Household net worth stands at an all-time high of $85.7 trillion, while consumer debt service burdens are close to 30-year lows. Finally, the household savings rate is hovering near 8 percent, compared with a scant 2 percent rate before the Great Recession.
Despite patches of weakness in the economy, we see ongoing improvements in consumer fundamentals. This should translate into holiday retail sales gains of around 5 percent when measured from fourth quarter to fourth quarter, at the high end of the range of seasonal gains in recent years.
Half, or 50 percent, of AIER’s Business-Cycle Conditions (https://www.aier.org/BCM) leading indicators were deemed to be expanding in October, down sharply from 67 in September. This marks a return to a neutral reading following five straight months in positive territory, and it marks the 74th consecutive month at or above the 50 percent level (Chart 3).
Each month, AIER calculates the percentage of its Twelve Leading Indicators that are judged to be cyclically expanding. Consistent readings above 50 suggest a low probability of recession over the next six to 12 months. Conversely, a drop below 50 percent indicates an increased chance of a contraction. However, before drawing conclusions, we look for confirmation from our cyclical score of Leaders. For October, it was 70, down from 77 but still well above neutral. With our Leaders’ index at neutral and our cyclical score comfortably positive, we see little recession risk over the next six to 12 months.
The proportion of expanding coincident indicators fell to 80 percent in October from 100 percent in September, reflecting some weakness in the economy. Among our six coincident indicators, three were viewed as clearly expanding while one was viewed as probably expanding. One was evaluated as having an indeterminate trend while the sixth probably was contracting. Three of the expanding indicators hit new cyclical highs in the latest month.
The proportion of lagging indicators judged to be expanding held at a perfect 100 reading in October, the third month in a row at that level following three months at 80. Four indicators were expanding or probably expanding, with three of them reaching new cycle highs, while two were viewed as having an indeterminate trend.
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