‘Tis The Season – The Global Economy Is Counting On You

The holiday shopping season has shifted into high gear for most of us; and I’m sure many of you readers of the Daily Pfennig ® newsletter are probably heading out to the stores later today to get some of those items on your list checked off. If you haven’t participated in the holiday spending yet, what are you waiting for? Don’t you know the global economy is counting on you?

There is always a lot riding on the holiday shopping season, and it is especially true this year given the fragile state of the global economy. Consumer spending makes up about 70 percent of U.S. economic activity. And, in spite of the recent growth of the middle-class consumer in China and India, U.S. shoppers are still the kings of all consumption. With Europe slipping back near a recession, Japan remaining in a deflationary spiral, and China’s growth slowing down, the global recovery is dependent on the U.S. and, specifically, the U.S. consumer.

A Rough Start

Unfortunately, this shopping season hasn’t started out as strong as expected. In fact, the data released the week following Thanksgiving indicated Black Friday was just ugly. According to data released by the National Retail Federation (NRF), shoppers spent about 11% less during the weekend following this year’s Thanksgiving.

According to NRF’s Thanksgiving Weekend Spending Survey, 133.7 million holiday shoppers were in the stores this year vs. 141.1 million in 2013. “A strengthening economy that changes consumers’ reliance on deep discounts, a highly competitive environment, early promotions and the ability to shop 24/7 online all contributed to the shift witnessed this weekend,” said NRF President and CEO Matthew Shay. “We are excited to be witnessing an evolutionary change in holiday shopping by both consumers and retailers, and expect this trend to continue in the years ahead.”1

But, according to a story I read on Bloomberg, online sales growth is also slowing. “Internet holiday shopping rose 8.5 percent on Cyber Monday yesterday, typically the busiest day for Web shopping as people return to their desks after the U.S. Thanksgiving holiday weekend. That compares with online sales growth of 20.6 percent posted on the same day a year earlier, according to a report by International Business Machines Corp.”2

However, the news regarding online shopping isn’t all bad. The same report on sales data from IBM’s digital analytics division showed a 17 percent rise over the Thanksgiving weekend vs. last year. Shoppers continue to shift their purchasing habits toward the convenience and cost savings that typically accompany the online retailers. Another possible reason for the decrease in Black Friday and Cyber Monday sales is the earlier start to this year’s holiday season. I couldn’t believe how many stores were open on Thanksgiving evening, and was amazed to see crowded parking lots on my way home from Thanksgiving dinner.

Lower Oil Prices To The Rescue?

And, in spite of the slow start, most retail analysts and economists continue to believe this holiday season will bring about a 4% increase in holiday spending. While wages have been fairly stagnant, consumers have recently received what seems like a pay increase due to the drop in fuel prices. According to data released by the U.S. Energy Information Administration, average gasoline prices of $2.89 per gallon are at the lowest level since December 2010 and more than 32 cents per gallon cheaper compared with one year ago.

I took a quick look at my EverBank credit card statement and see that my family has spent about $6,000 so far this year on gasoline. The 11% drop in prices will equate to an additional $660 in disposable income for us. And, the savings from lower oil aren’t only seen in lower gasoline prices – heating fuel oil prices have also dropped giving consumers another break this winter. And, transportation costs factor into the price of just about everything we purchase – lower fuel prices should lead to higher earnings for manufacturers and/or lower retail prices for consumers.

Prices Are Flat, But Inflation Takes Many Forms

The “big boss,” Frank Trotter, pointed something out to me in a discussion we were having the other day. He stated that one of the reasons inflation may feel higher than what is actually being reported is that income levels have barely kept up with prices. This leads to individuals spending a greater percentage of their incomes – even without price increases. As illustrated in the chart below, prices (as measured by the official Consumer Price Index (CPI) readings) have been increasing just slightly over the past several years, but even with these modest increases, income levels have barely kept pace. And, the price of Food and Beverages has increased much faster than the overall increase in prices. This has led to a “squeeze” on consumers as they spend more of their paychecks for the same amount of goods and services.



And, as readers of the Daily Pfennig ® newsletter know, in my opinion, the official CPI numbers have been thoroughly “massaged” over the years and don’t give us a true picture of the actual level of prices. Readers of the Daily Pfennig ® also know that we like to look at the inflation numbers published by our friends over at ShadowStats, which, in my opinion, give a much more realistic picture of prices over the past several years because they specialize in thoroughly analyzing multiple data sources and separating the meaningful from the less important.

No matter what your preferred reading of inflation is, I don’t think anyone would argue that the middle-class consumers have been squeezed during the “great recession.” It will certainly be interesting to see if the cheaper gasoline prices and resulting increase in disposable income will equate to a surge in holiday shopping. As I stated earlier, the global economy is certainly counting on U.S. consumers to help pull it out of its current funk.

So, What Are Your Plans?

If you haven’t already, please answer the question on our blog, which is apropos: How much do you plan to spend over the coming holiday season? We will be sharing the results in an upcoming Daily Pfennig ® newsletter along with a recap of just how this holiday shopping period ended up. It will be interesting to see if our poll lines up with the overall shopping numbers.

I know many of you will be reviewing your portfolio returns as we head into year-end and for most, diversification into alternative asset classes could look like a mistake. After all, just about every currency besides the dollar is down, and metals have also had a pretty tough year (with the exception of Palladium). But, I will point out that when you have a properly diversified portfolio, something should be down (and, at the same time, something should also be up). Diversification works in the long run, if not over shorter time periods.

With that, I will end today’s Sunday Daily Pfennig ® newsletter and encourage you all to head on out to the stores in order to do your part in boosting the global economy. I also want to wish everyone a happy holiday season, and thanks for reading the Daily Pfennig ® newsletter.