The holiday shopping season has officially kicked off, and it’s likely a less festive Santa than we have seen in recent years will be coming down the chimney. For sure, the nation’s collective stockings will not be filled with coal, but the presents will be less plentiful and generous than in 2022. We don’t expect consumers to zip up their wallets and purses entirely, but they are running out of the fuel that pumped-up spending last year and the year before. Job growth is slowing, the pandemic-era excess savings are mostly depleted, banks are tightening credit, student loan payments have restarted and borrowing costs have spiked.
We have noted in the past that the downbeat mood of households does not always translate into weaker spending decisions. That divergence was strikingly evident in the third quarter, when consumers went on a veritable spending binge despite expressing deep dissatisfaction with the economy’s direction. Now, however, they are behaving more like they feel, as retail sales in October fell for the first time since March. The National Retail Federation is expecting holiday sales in November and December to rise by 3% to 4% from last year, weaker than the 5.4% gain in 2022 and the blistering 12.7% in 2021.
The good news is that consumers are getting some relief on the inflation front. Retail inflation plunged from 9.1% in March 2022 to just over 3% this October, the most pronounced decline outside of a recession since the early 1950s. Wage growth is also slowing, but not as rapidly, so paychecks are going a longer way. That, in turn, should keep a floor under spending, and, perhaps, stave off a recession. But the Federal Reserve believes wages are still growing too fast and is the main hurdle preventing inflation from retreating to its 2% target. The risk is that the central bank will keep interest rates higher for too long, bringing on an unnecessary recession. Hopefully, the Fed does not shape policy decisions on an unrealistic timetable. By the time wage growth does slow enough, it may be too late for the Fed to start cutting rates to ward off a recession.