Glad tidings for the holiday season?

Current state of the U.S. consumer

Solid consumer spending this holiday season is possible. To begin with, total employment growth is up 4 percent and nominal personal income growth is up 6.1 percent from this time last year.⁴ Several fiscal support programs remain in place, including the Child Tax Credit payments and deferred payments on federal student loans. Such programs have, in part, contributed to an impressive rise in accumulated savings. We estimate that as of August, consumers had stockpiled an estimated $2.6 trillion in additional savings since February of last year, which could be a source of spending this holiday season.⁵ One caveat, however, is that at least some of the savings stockpile was used to pay down household debt over the last year. While savings may not be the primary source of spending growth, greater open-to-buy rates on consumer bankcards could serve as a tailwind to spending growth this season. Our latest survey data indicates that 53 percent of consumers plan to pay for gifts this holiday season with a credit card.⁶

Even with the solid drivers of consumer spending described above, job gains in recent months have slowed and consumer confidence has been softer. Overall consumer confidence is up 12.4 points from October of last year, but down from the highs reached in June of this year.⁷ The closely-watched expectations component of the confidence index, which tends to be highly correlated with future consumer spending, softened in Q3 but October’s reading showed a modest improvement.⁸

While the late summer surge in COVID cases played a role, rising prices for many consumer goods likely also weighed on consumer confidence. The Consumer Price Index (CPI) in September rose 5.4 percent YoY as higher input costs from retailers were passed on to consumers.⁹ Gas, food, electronics and even the price of gift wrap are all up sharply on a YoY basis, putting a squeeze on some consumers’ wallets.¹⁰ After taking into account inflation and taxes, consumer real disposable incomes are up a paltry 0.2 percent relative to this time last year.¹¹ While we expect real income growth to accelerate slightly in Q4, the combination of less fiscal support combined with more modest job gains suggests that holiday sales may be a bit softer than last year.

‘Tis the season for a new holiday outlook

With the mixed picture of consumer sector economic data, our forecast for holiday sales was particularly challenging again this year. Visa Business and Economic Insights projects that holiday sales will rise 7.9 percent this year, down slightly from the 8.6 percent pace last year but above the long-run average of 3.7 percent during the last expansion.¹²

On average, consumers plan to spend $702 on holiday gifts this year, up sharply from $616 last year according to Prosper Analytics.¹³ Those aged 35 and younger are expected to help lead sales higher this season as 75 percent of them expect to spend the same or more this season compared to 72 percent for all consumers. Prime spending-age consumers (those 35-54) are planning to spend less than other age groups this year, but fewer said they would avoid buying gifts altogether.¹⁴

Driving holiday sales higher again this year is the continued strength of goods purchases, higher inflation pressures and some residual effects of fiscal support. With the onset of the pandemic last year, aggregate consumer spending shifted sharply towards goods and away from services. The closure of businesses such as hair salons and dine-in restaurants helped drive this shift, as did consumers’ increasing use of e-commerce, which is more goods centric. While our survey data indicates that consumers are likely to use e-commerce a bit less than they did last year—59 percent indicated they would shop online this year versus 61 percent last year—we still expect the majority to do at least some of their shopping online.¹⁵

Given that our definition of holiday sales is in nominal terms—not adjusted for inflation—higher consumer prices will also boost YoY sales figures this season. Case in point are grocery prices, which were up sharply this time last year; they are up an additional 4.5 percent YoY this year.¹⁶ Finally, there are still some fiscal support measures in place such as the Child Tax Credit and deferred student loan payments that will help provide some households with additional “disposable income” to spend this year. The combination of these factors should help to keep holiday spending above average for the second year in a row.

Even a lump of coal could be hard to find this year

Our holiday forecast this year was complicated by several factors that could have a dramatic negative impact on our holiday sales outlook—the most obvious being the potential for another surge in COVID cases. While current case counts are trending downward, the Centers for Disease Control and Prevention still rates the level of COVID transmission as “high” in all but four states.¹⁷ We only need to look back at the third quarter of this year to see how quickly a surge in case counts can have an adverse impact on consumer spending.

We would be remiss if we did not mention one of the other biggest downside risks of all, the potential for store shelves to be empty of some goods. One of the largest challenges facing retailers over the last year has been trying to keep up with the re-acceleration in consumer demand, which stretched many retail supply chains to the breaking point. In fact, inventory concerns this holiday season were so acute among retailers that some turned to chartering their own container ships in order to protect their supply chains.¹⁸ Some retailers who were unable to take such drastic measures are cutting their outlook for sales growth in Q4 due to supply shortages. These shortages are behind much of the inflation pressures that have emerged in recent months and will likely translate into fewer price markdowns this year for goods that do make it to store shelves in time.

Last updated: November 2021