How Were Retail Sales This Holiday Season?

As most expected, department store sales lost share to online sales this past holiday shopping season. Kohl’s and Macy’s saw 2.1% drops in comparable store sales in November and December. Amazon likely had a great Christmas. If you are only focused on retail stocks, then a summary of the season is it was a hit or miss holiday. Whether the retailer did well depends on execution and if it is in a category which saw high demand. This article is about what the retail sales mean for the overall economy. The health of the consumer reflects how well the economy is doing. The consumer contributes to 2/3rds of GDP growth, so it’s critical to understand the nuances behind the data points. This may help us tell how the 2017 economy will shape up.

First, let’s get into the metrics reported. U.S. retail sales for December were up 0.6% from last month. Retail sales increased 3.3% in 2016 which was a decent acceleration from the morbid 2.3% growth in 2015. The National Retail Federation trade group said retail sales increased 4.0% in November and December. In the whole year, spending at department stores fell 5.6% and rose 11.4% at online retailers. Households spent 10% of their disposable income paying down debt which is near the lowest level since 1980. This likely has to do with interest rates being so low.

The chart below shows why holiday retail sales may have been better than last year. The Trump euphoria came at the perfect time to impact the holiday shopping season. The question is whether this is now leveling off as the Bloomberg Comfort Index took a dive in the last report. Friday, the University of Michigan Consumer Sentiment Index missed expectations for 98.5, coming in at 98.1. This leaves the question as to whether the positivity is wearing off unanswered.


As I mentioned, the retail sales were lumpy meaning some sectors did well and some didn’t. What appears to have driven sales growth was gasoline and autos. The sales of cars began to show signs of peaking in the summer and autumn, so car companies started giving out record discounts which worked to boost sales this holiday season. I consider the auto-market to be in a bubble driven by low interest rates. More subprime borrowers are getting loans which usually means the market is near a top. Even if you aren’t as negative on the auto industry as I am, you’d still grant the point that relying on one industry to drive sales growth isn’t sustainable. Gas sales have gone up because the price at the pump has gone up. Last year’s benefit from the cut in gas prices didn’t provide as much of a boost to other areas as expected. Now gas price increases are hurting other areas, so both scenarios have been negative. Sales excluding gas were up 3.8% in the last 6 months of 2016. This compares to 4.5% growth in 2015 and 5.7% growth in 2014.

The chart below shows retail sales excluding autos and gas. Month over month sales excluding these two categories were flat, missing expectations for 0.4% growth. The chart shows, on a year over year basis, December sales growth was 3.14% which was the slowest growth since February 2014. This factor makes it debatable if 2016 was actually better than 2015.


A final point I want to make is about the transition from shoppers buying goods at brick and mortar stores to online stores. This is change happening, but it shouldn’t be glossed over as a reason for every data point. A similar example to this is the labor participation rate decline. Some economists, which I feel are biased, blame the aging demographics for why the labor participation rate has dropped. This is analytical laziness. Because more older Americans are working now than ever before, the drop in the labor participation rate is only just over half the result of an aging America. The other half could be workers giving up looking for work or working in the underground economy. The media likes to simplify stories to make them easily consumed.

The chart below is the non-seasonally adjusted department store sales. While the year over year sales growth is mainly negative. You can clearly see a defined cyclicality to the results. There’s a few conclusions you can draw from this. The first is that the consumer is weak. This goes against the 4% headline number-driven narrative, but it’s not far-fetched. The second is that increasing gas prices may have caused consumers to accelerate their transition away from department stores and towards online buying. That theory is possible because the spike in department store sales in 2015 happened at a time when oil prices had just declined. That would only explain part of the decline of late because oil prices are still about half the price of 2014 while the department store sales growth is below 2014 and close to the bottom of the last recession. The final point I will review while discussing the chart of online sales.


The chart below shows online sales increasing which makes up the lost ground at department stores. There tends to be a big bounce in sales before recessions. This may be because online retailers like Amazon have the best deals and consumers are shopping at these stores to save as much money as possible because times are about to get tough. One other point on this topic is Signet, the top jewelry retailer, saw a 4.6% drop in sales this holiday season. Usually consumers like to buy jewelry in stores because they like to see the product. I doubt the shift towards online shopping was a major factor in this decline. Maybe consumers are too weak to splurge on such expensive items and are instead shopping online. We will know the reason behind Signet’s disastrous holiday sales results  when the firm reports earnings in a few weeks.



            We won’t know how the holiday shopping season went until the next few weeks when retailers report earnings. They will tell us the true story about how and why the consumer spent money on what it did. As of now, I can say if auto sales have a weak 2017, the economy is likely in trouble. The question is whether this means we have another mediocre year or if this is finally the one that ends the cycle.

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