Gift cards power January retail sales
Holiday sales were surprisingly robust
Consumers shrugged off last month’s spike in the omicron variant and brutal winter weather to post the strongest retail sales gain in 10 months. Nominal retail sales in January surged by a much stronger-than-expected 3.8%, nearly double consensus expectations for a 2% increase. Despite downward revisions to weak December results from a 1.9% decline to a larger 2.5% drop, the Christmas spending period, which we define as October through January because of gift card redemptions, soared 16.2% year-over-year (y/y). That’s more than triple the 5.1% y/y gain for the same period in Christmas 2020 and more than quadruple the average holiday spending gain of 3.9% over the past decade.
Strong labor market and wealth effect powered Christmas spending January’s average hourly earnings soared at an annualized rate of 5.7% over the past year, while December’s JOLTS report lists nearly 11 million open jobs (a record 1.7 job openings for every unemployed worker). The ADP private payroll survey added a strong 776,000 jobs in December, and initial weekly jobless claims recently fell to 223,000 (down 97% from their April 2020 peak). January’s household survey surged by nearly 1.2 million jobs, and the unemployment rate plunged to a cycle low of 3.9% in December
Evercore ISI reports that over the past 21 years, there’s been a near 90% correlation between the S&P 500’s fourth-quarter performance (up 11% in 2021) and holiday retail sales (up 16.2%). In addition, the value of residential housing rose 20% last year, with a 50% gain for houses valued at $750,000 or more. With two-thirds of Americans owning homes and 56% owning stocks in their retirement and college savings plans, the wealth effect the Federal Reserve orchestrated by cutting interest rates to zero nearly two years ago helped to support holiday spending.
Stronger-than-expected sales Nominal retail sales in January surged 3.8% month-over-month (m/m), December was revised down to a decline of 2.5%, November was revised up to a gain of 0.7%, and October surged by 1.8%, which got Christmas spending off on the right foot. Control results, which strip out food, autos, gas and building materials and feed directly into quarterly GDP, soared by a much stronger-than-expected 4.8% m/m gain in January (expected gain of 1.3%). December was revised down from a 3.1% decline to a larger drop of 4%, November improved to a modest gain of 0.2% from a decline of 0.5%, and October surged 1.8%.
Why is Christmas a four-month retail holiday? Because of Covid, many retailers began to aggressively promote their Black Friday holiday deals at the beginning of October, to create social distancing by spreading out the customer traffic in their physical stores. This pulled sales forward. November and December are prime holiday shopping months, of course, but we include January in our analysis because of post-holiday gift card redemptions, which only count as a sale when redeemed, not when purchased. Roughly two-thirds of redemptions occur in January (surprisingly, half of U.S. adults neglect to redeem their gift cards).
Gift cards were a powerful X-factor There was a record increase in gift card purchases this past holiday season. Reasons include fear of contracting the highly transmissible omicron variant, a cold, snowy and icy winter (for the fifth time in the past six years), inventory shortages due to ongoing supply-chain problems, and the risk of shipping delays by UPS, FedEx and USPS.
According to payments technology vendor Square, gift card sales surged 114% from November through mid-December (compared with the same period in 2020), based on physical and e-gift card sales from tens of thousands of U.S. retailers. Forbes reports digital gift cards rose to 30% of gift card sales in 2021, up from 20% in 2020. Givers were more generous this year, increasing their average gift 14% to $250 per card. In addition, historically, nearly 90% of recipients spend 20% more than their gift card’s value when they redeem. In total, an estimated $171 billion was spent on gift cards in 2021, with three-quarters during the four-month holiday season.
Getting into the weeds With gift cards playing such an important role in January’s overall surge in retail sales, it’s not surprising that online purchases leapt 14.5% m/m. Housing demand remains strong, driving m/m sales of furniture and building materials up 7.2% and 4.1%, respectively, in January. Department stores surged 9.2%, and enormous pent-up demand for autos fueled a 5.7% gain last month.
Federal Reserve on deck Today’s strong consumer spending did nothing, in our view, to dissuade the Fed from aggressively tightening monetary policy at its policy setting meeting on March 15-16. We expect officials to end the bond-buying taper next month, hike the fed funds rate 50 basis points for the first time in nearly 22 years, and possibly follow that with quarter-point rate hikes in five of the six remaining meetings this year. We think they might skip the Nov. 2 meeting due to the proximity to the midterm election on Nov. 8. Policymakers also might begin to actively shrink the Fed’s $9 trillion balance sheet by midyear, perhaps at a pace as high as $1 trillion annually.
Frozen February? Consumers typically hunker down after their holiday spending spree to right-size budgets. Putting aside the Fed’s expected interest-rate hikes and another tough winter, there are several fundamental factors that could chill consumer spending in coming months:
- Backing away from the fiscal cliff The generous unemployment bonus and the child-tax credit, among other government programs, have expired, and we don’t believe Congress has the appetite for more stimulus this year.
- Consumer confidence down sharply The University of Michigan Consumer Sentiment Index has plummeted to an 11-year low of 61.7 in February.
- Savings rate falling The personal savings rate has plunged from 26.6% last March to a near-trendline 7.9% in December.
- Surging inflation The nominal Consumer Price Index has surged to a 40-year high of 7.5% in January.
- Soaring energy prices Crude oil has nearly tripled over the past 15 months to almost $96 per barrel, while lagging gasoline prices have risen by two-thirds to $3.51 per gallon.