Three Things I'm Watching (Dec. 7, 2023)
Did you miss me? After a few weeks off, Three Things is back!
In Today’s Note:
Record Black Friday and Cyber Monday: The 2023 Black Friday and Cyber Monday events saw a record-breaking turnout of over 200 million shoppers and significant online sales growth. However, the overall increase in spending was modest, indicating a nuanced shift in consumer behavior towards specific retail sectors
Real Spending Declines, Despite Nominal Records: Despite high consumer participation and nominal spending records, there was an actual decline in real spending when adjusted for inflation. This trend, highlighted by a slight decrease in average holiday gift spending and total sales being lower in real terms, underscores the challenges in achieving projected sales growth and points to consumer price sensitivity
Emerging Financial Strains Among Consumers: Recent data shows increasing financial strain on U.S. consumers, marked by rising credit card utilization and delinquencies, record high credit card debt, and a growing reliance on "buy now, pay later" services. These factors, combined with reports of reduced spending among lower-income consumers and signs of a weakening job market, suggest potential vulnerabilities in consumer financial stability
#1: Record Black Friday and Cyber Monday
An autopsy of the 2023 Black Friday and Cyber Monday shopping events shows that consumer turnout and spending set records, but the spending growth was modest overall:
Record Turnout: A record 200.4 million shoppers participated in the five-day period from Thanksgiving to Cyber Monday (versus ~197 million in 2022 and ~10% higher than estimates from the National Retail Federation)
Black Friday and Cyber Monday set new records in total spending, and new records specifically on in-store and online shopping; but the figures differ widely when you dig into the details:
Total U.S. retail sales (ex-autos) were up +2.5% YoY on Black Friday, including both in-store and online purchases, according to Mastercard SpendingPulse
Online sales on Cyber Monday rose 9.6% YoY to $12.4 billion, and for Cyber Week (Black Friday to Cyber Monday), online sales rose 7.8% YoY to $38 billion, according to Adobe Analytics data.
One stunning stat: In the peak Cyber Monday hour (10:00-11:00pm EST), online shoppers spent $15.7 million every minute
In-Person foot traffic increased by 1.5% YoY, and net sales rose by 0.9% YoY during the weekend, according to data from RetailNext
Foot traffic data shows that consumer priorities seem to be shifting: Retailers in specific sectors seeing significant foot traffic increases, including health and beauty (+11.5%), jewelry (+5.1%), and apparel (+1.7%). Home goods retailers, on the other hand, experienced a 7.5% decline
#2: Real Spending Declines, Despite Nominal Records
Despite the record turnout and spending, I do see some troubling signs in the Black Friday and Cyber Monday data, ranging from a slight decline in holiday shopping and a notable decline in spending on a real basis.
Concerning decline in holiday shopping: People spent an average of $321 on holiday gifts this year (down ~1% from 2022), according to the NRF.
The NRF estimates that overall holiday sales in 2023 will increase by 3-4% versus last year, but that forecast might be hard to reach given the lackluster holiday shopping thus far
Two obvious counterarguments to my view: 1) Declining inflation means that discounts weren’t as attractive this year, or 2) Consumers are just waiting longer to do their holiday shopping this year
The data support my view, though, considering that there were record discounts across the board, and that people were actively looking for holiday deals:
Record discounts across the board: According to Adobe, Cyber Monday discounts peaked at 31% off listed price (vs. 25% in 2022). Discounts were strong across the majority of categories tracked by Adobe with computers at 24% (vs. 20%), televisions at 19% (vs. 17%), apparel at 23% (vs. 18%), sporting goods at 15% (vs. 10%), furniture at 21% (vs. 8%), and appliances at 18% (vs. 16%)
Virtually everyone was holiday shopping: 95% of Thanksgiving weekend shoppers made holiday-related purchases, in line with historical levels and the 97% level in 2022
Flat real spending is the biggest problem from my perspective: Despite the increase in spending during Black Friday, with records in terms of consumer participation and total expenditure, didn't necessarily translate into more purchases
Adjusting for a 3.2% inflation rate, total Black Friday Weekend spending growth (2.5%) was negative, which reflects a broader trend of flat retail sales growth in the economy, when adjusted for inflation (see Figure 1)
It also concerns me that the strong spending observed during Black Friday/Cyber Monday was likely fueled by the deep discounts referenced above, suggesting that consumers are highly price-sensitive and seeking value amidst economic pressures
Figure 1: Nominal Retail Sales vs. Real Retail Sales
#3: Emerging Financial Strains Among Consumers
The latest data, ranging from credit conditions, to debt levels, and “buy now, pay later” behavior show that the US consumer may be starting to feel the sting of higher rates and exhausted excess savings.
Credit Conditions: There are indications of financial strain among consumers. The latest New York Fed data on household debt and credit (which lags by around a quarter) showed that credit card utilization and delinquency rates are on the rise, suggesting that many Americans are nearing their credit limits
Increased Delinquencies Amid High Rates: Credit card delinquencies have risen significantly, reaching almost 3% in the third quarter of 2023, the highest since early 2012.
This rise in delinquencies is seen across consumer loans, which have increased to 2.53% in the same period, the highest rate since the first quarter of 2013. (It’s worth noting, however, that the delinquency rate is still below the historical average of 3.07% for bank-held debt)
Record Credit Card Debt: The outstanding credit card debt has surged to about $1.2 trillion, with interest rates also hitting a record high of approximately 23%
Consumer Debt Payments Surging: Personal interest payments as a percent of disposable personal income (the amount of income left over after taxes) reached a record low during the pandemic, but has now surged to the highest level since just before the GFC (see Figure 2)
Figure 2: Personal Interest Payments as % of Disposable Personal Income
Buy Now Pay Later (BNPL) Usage: BNPL are increasing in popularity, as evidenced by a record 42.5% increase in usage during this year’s Black Friday Weekend.
This trend to some extent likely reflects rising familiarity, access, and comfort among consumers.
But it also likely reflects the fact that consumers are increasingly turning to credit to fund their purchases, which is not sustainable when debt levels and interest rates are so elevated
Retailers Growing Wary: Dollar Tree’s CEO Rick Dreiling recently reported a noticeable pullback in spending, especially among lower-income consumers, due to inflation and reduced government benefits
Weakening Job Market: The latest Job Openings and Labor Turnover Survey (JOLTS) data show a decrease in job openings, indicating a weakening labor market.
In October 2023, job openings fell to 10.3 million, down from 10.7 million in September. This decline further confirms a cooling job market, which could impact consumer spending power and confidence moving forward
Layoffs slightly increased by about 2% in October, but overall, layoffs remain low. The number of quits has been relatively stable, showing only a marginal 0.5% decrease in October
The November payrolls report, released tomorrow, is expected to show a slight improvement versus last month (the consensus forecast is for 175,000 new nonfarm payrolls in November vs. 150,000 in October).
But this is likely attributable, at least in part, to the end of recent worker strikes and the return of those workers to their respective employers’ payrolls