Holiday Spending: How Much Does Wealth Matter?



As we move toward the terrible trio of shopping events this weekend — Black Friday, Small Business Saturday, and Cyber Monday — billions of dollars will change hands, and market watchers are reminded that money makes the world go ’round. Consumer spending drives the majority of U.S. economic activity, and these sales events will account for an outsize share of annual earnings at many consumer-facing companies.

Predicting this cash flow is enormously difficult, but it’s the habit of market watchers from nearly every industry to keep at least one finger on the pulse of the consumer during the holiday season. A healthy consumer, after all, generally means healthy earnings — more importantly, a healthy consumer generally means a healthy economy.

It’s wealth that makes a consumer healthy. Wealthier consumers can more comfortably afford the cost of living and have larger discretionary budgets. The larger these budgets are — and the more optimistic consumers are about current and future economic conditions — the more people are expected to spend. The more they spend, the faster the world goes ’round, the stronger the economy, and the happier everyone is.

Theoretically, at least. This year, the diagnosis is somewhat mixed.

According to Discover Financial, consumers will tap savings and access credit to spend, on average, $1,014, up 20 percent from 2012. According to the American Research Group, average spending plans have fallen 6 percent to $801. The National Retail Federation predicts a 3.9 percent increase in total holiday sales to $602.1 billion, or $737 per person on average. A Gallup survey reveals that planned spending decreased 8.5 percent on the year to an average of $704 per person. Meanwhile, Morgan Stanley expects 2013 to be the worst holiday shopping season since 2008.

So what’s behind the mixed diagnosis? It seems like observers should be able to at least reach a consensus on the direction of holiday spending this year. Does the recovery have traction or is the transmission slipping?

Economic data have recently been nothing but opaque, but broadly speaking, the there appears to be more support for the “up” thesis than the “down” thesis regarding consumer spending. The U.S. Bureau of Economic Analysis reports that both real disposable personal income and personal consumption expenditures have been on the rise. This suggests that not only are people earning more money but they are also spending it. Real DPI climbed 4.5 percent sequentially in the third quarter of 2013 compared against sequential third-quarter gains of 1.7 percent in 2012 and 3.9 percent in 2011.

The so-called wealth effect also factors into the equation. Stocks are at all-time and multiyear highs, which obviously bodes well for those who hold them. Home prices have also recovered dramatically since the trough of the crisis. On the Wednesday before Thanksgiving, the Nasdaq opened at a 13-year high of 4,026.92, the Dow opened near an all-time high of 16,120.20 at 16,073.37, and the S&P 500 opened near a multiyear high at 1,804.48. Meanwhile, home prices have nearly recovered to pre-crisis levels, according to the S&P/Case-Shiller home price index. Home prices increased 13.3 percent in the 12 months through September.

Increases in the price of equities and homes increases the real and perceived wealth of those who own them, and this increased wealth usually translates into increased spending. Dean Baker, an economist at New York University, suggests that, for real estate, “recent estimates of the size of the wealth effect put it at 6 percent, meaning that homeowners will increase their annual consumption by 6 cents for every additional dollar of home equity.”

However, it’s worth pointing out that the home ownership rate has declined over the past few years, from recent highs of 69.2 percent in fourth-quarter 2004 to 65.3 percent in the third quarter of 2013, according to the U.S. Census Bureau.

A Gallup survey from June also suggests that the market rally has left some Americans totally in the dust. Only 10 percent of respondents said that the stock market surge has benefited them “quite a lot,” 33 percent replied it helped “somewhat,” 33 percent benefited “a little,” and 21 percent said it did not help at all.

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