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Tuesday, November 19, 2013

Christmas Spending Further Explained

By Lydia Saad

Some media coverage of Gallup’s recent Christmas spending article has focused exclusively on the decline in Americans’ average spending intentions in dollars, from $770 in November 2012 to $704 today. However, this overlooks our analysis of the data in the same article, saying the decline merely points to a lower-than-average increase in holiday retail sales, not a decline in overall retail spending. Specifically, the data predict a 1.7% to 2.4% increase in holiday retail spending this year.

How can this be?

For one thing, the population has increased, as it does every year, so even if individual Americans spend less in 2013 than what they spent in 2012, the number of people spending money will be greater, thus somewhat offsetting this year's decline in average per capita spending. Population growth is also a key reason actual holiday retail spending almost always rises -- what varies is the degree. According to National Retail Federation, the average increase in holiday retail spending over the past decade has been about 3%. In a good year, sales will rise by 4% or better, and in a not-so-good year, by 2% or less. Then there is the singular case of 2008, when holiday retail spending actually declined by 4.4% amid the U.S. financial meltdown -- making that an undeniably bad year.

Additionally, Americans’ predictions of how much they will spend on Christmas gifts is as much an attitude as a factual report. Thus, while it may reflect specific budgetary plans, there is also an emotional component to the number -- essentially measuring consumers’ holiday spending mood. When consumers feel confident about the U.S. economy and comfortable financially, they are more likely to give Gallup a robust holiday spending prediction, possibly overstating what they will ultimately spend once they see the bills piling up. When they have the economic or financial jitters, they are more likely to respond conservatively, yet perhaps splurge once they are confronted by a festively decorated mall.

Given these factors, Gallup finds there is not a one-to-one correspondence between the year-to-year change in the dollar amount that individual Americans say they will spend and the percentage change in total holiday retail sales (as calculated by the National Retail Federation). However, there is a fairly strong relationship between the magnitude with which Americans’ dollar-estimates increase or decrease each year, and how much actual retail spending grows.

Gallup’s regression models that compare Americans’ annual November estimates of what they will spend on gifts to actual retail spending over the past decade point to weak growth in 2013 holiday sales -- as noted, in the 1.7% to 2.4% range. While certainly below average, this range is far from the retail disaster that occurred in 2008, and that, to some degree, may have reset retailer expectations for what “good” and “bad” even mean.

The following chart aligns the two trends. Note that, aside from 2008, in years when the Gallup spending estimate was significantly lower than the year prior (2000, 2001, and 2002), the rate of increase in holiday retails sales was positive, but consistently below 4%. This is the comparative group for Gallup’s latest spending estimate, given this year's $66 decline in expected spending compared with last November.

Finally, Americans’ estimates of what they will spend fell sharply over the past month, from an average $786 in early October to an average $704 in early November. Thus, in our latest report, we highlighted that consumers had trimmed their spending plans, whereas in our October report we had talked about “cautious optimism” for retailers. It’s possible that as the country moves further past the political turmoil of October, and if the bull market on Wall Street continues, consumers’ spending intentions will rebound. Gallup’s early December update will thus provide an important final look at how this year’s holiday shopping season is shaping up.


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