Christmas Shoppers Must Be Willing and Able

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Christmas Shoppers Must Be Both Willing and Able

It has been a long and difficult year for retailers. They’ll be watching us this holiday season, hoping we can help them get what is most likely tops on their Christmas list—some good sales news. Will the recent improvements in the economy translate to increased spending? At this point in time, the answer to that question is a definite “maybe” since signals indicate that consumers have good reasons both to spend more money this holiday season and to keep their wallets shut.

Two important drivers of consumer spending are ability and willingness. Ability, or the capacity to spend, is determined primarily by the level of the consumers’ income and debt. The willingness to spend money is largely affected by consumer confidence.

On the ability front, news is mixed. Jobs losses during this year have decimated some households’ spending budgets and almost certainly will reduce dramatically their holiday spending. Yet, in spite of job losses, overall household purchasing power has increased modestly. Average weekly earnings, adjusted for inflation, increased from October 2008 to October 2009 by 1.2 percent. Consumer debt actually decreased by six percent this year after steady and large increases over the past 18 years. Both of these phenomena increase the capacity to spend. Even though the average household debt has decreased because of more savings, we cannot predict that increased spending will follow. Consumers may plan to continue to reduce their debt levels and establish some balance to their financial positions.

According to Deloitte’s 24th Annual Holiday Survey of retail spending and trends, as the holiday season kicks off, Americans are more optimistic than last year. Slightly more than half of the survey respondents said they expect the economy to improve in 2010. Last year at this time, only 28 percent felt that 2009 would be better than 2008. This optimism would seem to bode well for increased spending; yet, on average, the respondents expect to spend less money on gifts, down to $452 compared with $532 in 2008, and $569 in 2007.

Interestingly, the Deloitte survey indicates that consumers appear willing to increase holiday spending on items for themselves such as socializing away from home, entertainment, non-gift clothing and home/holiday furnishings. These increases lift consumers’ total anticipated holiday spending to $1,145, which is a 16 percent increase over last year.

The survey also shows other effects of the recession on holiday spending. For instance, discount stores are expected to be the top choice for most consumers with online shopping coming in as a strong second. Traditional department stores continue their downward trend. Only 23 percent of the respondents expect to use this option, a sharp drop from last year’s 35 percent.

Gift cards hold their first-place position for the sixth year in a row, with 64 percent of consumers planning to buy them as presents. Technology-related gifts are expected to continue to grow in popularity; computer and video games lead the pack with 26 percent (up from 21 percent in 2008) of consumers planning to purchase these items.

Cincinnati may see increases in total holiday spending due to the allure of a new outlet mall and new department stores. Shoppers that are attracted from beyond the Cincinnati region will infuse “new” money into our region, a welcome boost to the local economy.

One note to those consumers who are both able and willing to spend their dollars: if you are expecting a repeat of last holiday season’s deep discounts, you may be disappointed. Retailers have maintained leaner inventories this year, and thus, there won’t be as many surpluses that drove prices down last year.
George Vredeveld, Director of the Economics Center for Education & Research and the Alpaugh Professor of Economics at the University of Cincinnati’s College of Business.