NRF Optimistic About Holiday Spending

Consumer Is A Mystery

Undoubtedly, this is the hardest holiday shopping season to predict ever. Normally, retail sales are hard to predict, but usually it’s not difficult to get within a couple of percentage points of the result. This current season is an order of magnitude tougher. 

As a hypothetical, if someone predicted 3.5% growth and it came out at 5%, that would be a decent-sized miss in a normal year. You want to predict within 0.5% which is tough. This time, if you get within 2%, it’s a victory. Obviously, as the season goes on, the predictions get easier because you have more data. We're talking about making your guess before Black Friday.

As you can see from the chart above, the 7 day average in growth of retail and recreation spending from the baseline in March has declined incrementally in America in the past few weeks. There were major step changes in the U.K. and France which had lockdowns because of their uncontrolled COVID-19 outbreaks. Shutdowns allowed Europe to go from exponential growth in cases to declines. Cost was a weak economy for a few weeks.

Obviously, that’s not the only cost. Shutdowns will lead to lasting financial, health, and psychological damage to citizens. In other words, there is no winning formula. COVID-19 will cause health and economic damage no matter what policy is pursued. America avoided the retail sales decline, but its outbreak is still a big problem. Good news is there are early signs of it being controlled within the next few weeks. Growth rate is slowing and the positive rate is falling.

It was shocking to see the National Retail Federation predicted holiday sales to rise 3.6% to 5.2%. Trade group usually releases its prediction in early October. This time, it waited until November 23rd because of COVID-19 related uncertainty. Maybe the trade group saw positive signs 6 weeks ago, but didn’t want to get caught being too optimistic. The situation is a little clearer now in that we see the early effects the virus is having on the consumer. 

No one wants to play armchair epidemiologist, but obviously, the outbreak plays a role in consumer spending. A 2nd variable is fiscal support. If the government decided today it will extend unemployment insurance and give out $1,200 checks, spending would explode. It could be a great holiday season.

Some are expecting low single digit growth which means they're a little more pessimistic than the NRF. Retail sector was up 3.7% on Monday on the positive prediction from the NRF and the positive vaccine news. Undoubtedly, retail will need help from online sales to have any growth. 

As you can see from the chart above, online sales are expected to rise from $142.5 billion to $189.1 billion in the final 2 months of the year. That’s 32.7% growth. Last year only had 13.1% growth. This is the final push for online sales before spending goes back to normal. In Q2, I expect brick and mortar retail to take back some market share.

Another Vaccine

AstraZeneca/Oxford vaccine phase 3 data was announced on Monday which helped boost the reopening stocks again. This combined data shows the vaccine is 70.4% effective. Two separate dosing regimens showed 90% efficacy and 62% efficacy. 

A 90% efficacy dosing was when a half dose was given the first time and a full dose was given the 2nd time. And a 62% efficacy regiment was when a full dose was given both times. That likely means they will go with the first dosing regimen when the vaccine goes out. Best aspects about this vaccine are it can be stored at normal fridge temperatures and distributed with existing logistics which means it will go out quickly.

While that’s not as good as Pfizer and Moderna’s vaccines which have 95% efficacy, this vaccine is needed because it will increase supply quickly. Charts above show the difference between how this pandemic will be resolved with just the mRNA vaccines (Pfizer & Moderna) versus if all vaccines are approved such as the AstraZeneca one. 

As you can see, the bear case is if just the mRNA vaccines are approved. Even in this scenario, herd immunity will be reached in June and a full vaccination will occur by October. In that scenario, we will likely see economic activity back to normal by late spring/early summer.

A bull case scenario where all vaccines are approved shows herd immunity will be reached in March and full vaccinations will be done in June. There are reports that vaccines will keep people immune for decades which means this virus won’t be an issue after the vaccines are distributed. 

In this scenario, economic activity will be back to normal by early spring. Akey variable is what normal looks like. Economic growth could be even stronger with another stimulus that includes $1,200 checks.

Less Pay When ‘Off Location’

Working from home sounds great because you get to avoid spending time traveling and you can live in a cheaper neighborhood. Cities are more expensive because that’s where work is. If some people leave, it’s also a win for city dwellers because it lowers rent. 

However, this change isn’t perfect for those who move away. As you can see from the chart below, only 61% of employers will keep pay the same if employees move away to cheaper cities.

Risk of a pay cut will prevent many people from leaving. Maybe a large portion of workers will go back to the office most of the time after all. A post COVID-19 economy might not be as different from the pre-COVID economy as we thought. 

Vaccines are a game changer. This has effectively been a 1 year change. If COVID-19 would have forced social distancing for a few years, going back to normal would have been tougher. It will likely be tougher to get a promotion if you work from home while your counterparts are at the office. There is no way to replace in person contact. 

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