Is the US consumer saying goodbye to the Great Recession and hello to a heady holiday season? Initial sales results might paint a rosy picture. Retailers pulled in nearly $60 billion, up from $54.2 billion a year-ago, in the four days of shopping that kicked off on Thanksgiving Day. The increase was driven by a 6% jump, to $423, in dollars spent per shopper.
Despite the encouraging start, investors should avoid prematurely uncorking the New Year’s champagne. I’m not convinced that a big Black Friday – or Cyber Monday – will necessarily translate into big retail gains. Here’s why.
- Historically, there has been no correlation between Thanksgiving weekend sales and overall holiday sales. A big Black Friday does not necessarily carry-over into the rest of the holiday shopping season. The reason: shoppers are increasingly front-loading their holiday purchases. Big sales on Black Friday may simply translate into slower sales closer to the holidays.
- The consumer is still struggling. We had more evidence of that on Thursday with the release of the revised third quarter GDP report. Personal consumption was revised lower to 1.4%, the slowest level since the second quarter of last year. Consumption growth is weak because income growth is slowing. After taxes and inflation, incomes are barely rising. Until the labor market starts to stage a more substantial recovery, income, and by extension consumption, is unlikely to pick-up.
- Finally, it does not help that the savings rate is back down to a relatively paltry 3.3%, a 10-month low. Under different conditions, consumers could compensate for their lack of income growth by drawing down their savings. In the current environment, there is not that much to draw down. In other words, while consumers may be more willing to spend, they lack the wherewithal to do so.
I continue to believe that the US economy will grow in 2013, assuming we can avoid the fiscal cliff. That said investors need to be conservative in their expectations. The economy is still largely driven by consumption. With the consumer still struggling with too much debt, too little savings, and very little income growth it will be hard for GDP growth to accelerate much beyond the 2% rate that has defined the recovery since 2009. While we will see some temporary spikes in growth, they are unlikely to be driven by the consumer, or last for very long (the jump in third quarter GDP was completely driven by a surge in inventories, which is not where you want growth to come from).
In the meantime, we believe there are good investment opportunities – emerging markets, smaller developed countries, and global technology companies. What they all have in common: the investment thesis is not dependent on a resurgent US consumer.