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Outlook for Holiday Retail Season Brightens

Prof. Peter Morici - 9/14/2006

Today, the Commerce Department reported retail sales increased 0.2 percent in August from July, and retail sales, less automobiles and parts, were up 0.2 percent. Compared to a year ago, August retail sales were up 6.7 percent, and excluding automobiles and parts, retail sales increased 7.5 percent.

Gas Prices, Retail Sales and Growth

In recent months, higher gasoline prices have pinched consumer pocketbooks and slowed the economy, but conditions appear to be changing.

In August, the average retail price of gasoline was up 18 percent and gas station sales were 11 percent higher than a year earlier. Non-gasoline station sales were up only 6.2 percent, in line with the growth of disposable income.

More broadly, higher energy prices and interest rates and the flagging housing market have taxed consumer optimism, and slowed automobile sales, business investment, jobs creation, and economic growth.

Over the last month, gasoline prices have fallen more than 35 cents a gallon and are now significantly below September 2005 levels. If sustained, lower gas prices will free up enough disposable income to lift non-gasoline retail sales by an additional percentage point over 2005 levels, and give the economy a needed jolt.

Going forward, inflation will moderate, and although home sales have softened, housing prices remain remarkably firm. While homeowners may not expect much appreciation over the next twelve months and values may fall in some cities, home prices remain 35 percent higher than three years ago. That reservoir of wealth has only been partially tapped.

The combination of falling gas prices and the realization that housing prices are not collapsing will give consumer confidence a lift. The holiday season will be brighter than retailers are expecting, early season sales and markdowns more limited than in recent years, and profit margins stronger than analysts are predicting.

The retail sector and economy will outperform the consensus of forecasters. Retailers will post gains in the range of 7 percent over last year. Fourth quarter and first half 2007 GDP growth will be above 3 percent.

The combination of stronger than expected retail sales and GDP growth will lift corporate profits and stock prices. Conditions are emerging for a strong end of year stock rally.

Fall and Holiday Retail Trends

Woman’s clothing will do well for several reasons. Consumers will have more money to spend than they expected. Designers are introducing attractive clothes that sharply depart from recent seasons, prompting women to turn their wardrobes. Fall and winter offerings are much more in line with an economic climate of constrained optimism and sensibility—fewer frills, more grays and subdued tones will compliment a general return to moderate expectations about careers, housing values and the business outlook.

For men, a moderating job market will impel more traditionalism, and support sales of conventional, more essential dress clothes.

Consumer electronics will post decent growth but no new “must have” technology will kick up that sector. Content and quality will drive sales. Consumers will not be hunting for the lowest prices but will insist on good value and robust performance.

Overall, middle-range and value retailers whose buyers get it right, and crowd racks and shelves with clothing, accessories, electronics, and other gadgets following these trends will be privately surprised by how well they do.