‘Tis The Season Of Holiday Spending For US Consumers—Will They Defy Tepid Expectations?

Are U.S. consumers able to keep up the spending spree that’s propped up the economy and prevented a long-anticipated recession? The Black Friday holiday shopping weekend could shed light on that question.

Will The Consumer Spending Juggernaut Slowdown?

Throughout the year, consumers have defied economists’ predictions of a slowdown and have kept on spending—and whether that trend continues could determine whether the economy chugs along, or sinks into a recession.

“The average household remains on relatively solid financial footing despite pressures from still-high inflation, stringent credit conditions and elevated interest rates,” Jack Kleinhenz, chief economist at the National Federation of Retailers (NRF), a trade group representing stores, wrote in a commentary. “The overall story for this holiday season is that it looks very good.”

The NRF is expecting Black Friday to kick off a busy holiday season with retail sales totaling 3% to 4% over last year, close to the typical pre-pandemic yearly growth, according to a forecast released earlier this month. The trade group The expects a record 182 million people to shop this weekend, up 12% from last year, based on a poll of 8,424 U.S. adults.

Online outlets are expected to have an even better holiday season, showing 8.8% growth over the previous year, according to an average of six forecasters compiled by Wedbush Securities. However, many individual retailers including Walmart (WMT), Target (TGT), Foot Locker (FL), and Home Depot (HD), have reported shoppers have been cutting back, looking to stretch their budgets.

The four days after Thanksgiving are the busiest ones for retailers, and how much people spend on that crucial long weekend will help show how much households are still willing and able to open their wallets despite inflation, high borrowing costs, October’s resumption of required federal student loan payments, banks getting stricter on credit, and other factors squeezing household budgets. 

Economic Conditions Could Prove An Impediment

However, there are threats to the optimistic outlooks. A growing number of households are struggling to pay their bills, recent data shows. Delinquencies on car loans and credit cards crept above pre-pandemic levels in the third quarter, with people under 40 seeing the biggest increases according to the Federal Reserve Bank of New York. Pay raises have been getting smaller too, as the job market loses steam. 

Officials at the Federal Reserve are also eyeing consumer spending data for signs of weakness, according to minutes of the Fed’s policymaking committee’s November meeting, released Tuesday.

According to the minutes: “Some participants remarked that finances of some households—especially those in the low- and moderate-income categories—were increasingly coming under pressure amid high prices for food and other essentials as well as tight credit conditions.”

The Fed has been battling those high prices by raising interest rates to a 22-year high over the last year and a half, which has raised borrowing costs for credit cards and all kinds of consumer loans, as well as spurred banks to pull back on credit. Fed officials have sought to discourage spending by consumers and businesses to slow the economy and allow supply and demand to come back into balance, putting the lid on the rampant price increases of the past few years.

One of the biggest questions hanging over the economy: whether those rate hikes will slow the economy so much that it falls into a recession, or whether household budgets will continue to weather the storm, and we’ll get a historically rare “soft landing” from the recent episode of inflation. A large part of the answer will be determined by how much consumers are willing to spend on Black Friday and going forward.

A Hot Job Market Propping Wallets Open?

A major factor in the outcome will be how good the job market is, and despite a slowdown in hiring, with the unemployment rate remaining near a 50-year low, jobs are still relatively easy to hold on to. The number of new unemployment claims fell by 24,000 last week, the Labor Department said Thursday—a downtick that reversed the previous week’s surge, and allayed fears of impending mass layoffs. 

And as long as employers remain reluctant to lay off employees amid a persistent shortage of workers, people may well just keep cash registers ringing.

“Without lots of layoffs, it is hard to see why consumers would sharply curtail their spending—a necessary condition for recession,” Mark Zandi, chief economist at Moody’s Analytics, wrote in a commentary last week.