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Strong US holiday sales predicted amid economic, geopolitical concerns

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Strong US holiday sales predicted amid economic, geopolitical concerns

A robust U.S. economy is driving expectations for a strong holiday sales season, though geopolitical, trade and recession risks could weigh on consumer sentiment and temper growth, experts said.

"The tariffs, trade issues, talk of a recession, those are potential issues but ... the job market is tight, wage growth is picking up, [the] stock market is trending higher," Ryan Sweet, director of real-time economics at Moody's Analytics, said in an interview.

According to forecasts released in the last week, the National Retail Federation expects sales for November and December to grow between 3.8% and 4.2% compared to the previous year from 2.1% growth in 2018, while Moody's Analytics predicts 5% growth year over year from the 3.9% growth reported for 2018's holiday sales. Coresight Research expects stronger 4% growth compared to 2.1% in 2018, while Cushman and Wakefield expects holiday sales growth to slow to 3.7% from 4.6% in 2018.

While exact targets vary, the forecasts reflect a strong economy including unemployment below 4%, rising wages and positive retail sales in recent months, according to experts. But those forecasts also come against the backdrop of trade disputes, an impeachment inquiry into President Donald Trump, and concerns about a recession that could affect consumers' willingness to spend.

And although retailers are booking less of their total sales from the holiday period than earlier years, it still makes up more than a fifth of total annual sales and remains an important time for the industry, experts said.

Strong economy but cause for concern

Experts are banking that strong economic indicators will help boost holiday sales. Unemployment dipped to 3.5% in September, while average hourly earnings grew 79 cents year-over-year to $28.09 and retail sales have continuously risen for months, according to government data.

"Consumers are in good financial shape and retailers expect a strong holiday season," NRF President and CEO Matthew Shay said. However, consumer confidence could be "eroded" by a continued downturn in trade issues, interest rates, global risk factors and political rhetoric, Shay said.

Cushman and Wakefield's expectations of a sales slowdown compared to 2018 is driven by tariffs, growing geopolitical and economic uncertainty and continued stock market volatility.

"That could translate very directly into consumers pulling back," Garrick Brown, vice president of retail intelligence for Cushman and Wakefield, said in an interview.

Worry over trade conflict and tariffs remains a key concern for forecasters. The ongoing U.S.-China trade spat has so far resulted in tariffs on $550 billion in imports from China and retaliatory tariffs on exports to the country. Although the Trump administration delayed a scheduled increase in tariffs on some goods until December, duties now in place could still hurt consumer behavior, Brown said.

Retailers are utilizing several mitigation strategies including stockpiling inventory, shifting production out of China and negotiating with their suppliers and vendors. While retailers have signaled reluctance to raise consumer prices, the possibility remains a key concern.

"There's a lot of retailers telling their vendors 'we're not going to absorb the cost.' Well, something is going to give there, eventually, the consumers will absorb the cost. That's just the way it works," Brown said.

Sweet, of Moody's said although any potential price hikes will not be enormous, they could slow down consumer spending.

Nearly eight in 10 consumers surveyed by the NRF are concerned about the impact of tariffs on prices regardless of whether they've felt the impact, according to Shay.

"That concern could certainly impact whether or not their confidence remains stable," Shay said during an Oct. 3 media call.

Concerns about trade policies and the state of the global economy are also showing in the University of Michigan's consumer sentiment index. A third of those polled in the most recent monthly survey mentioned trade policy as a cause of concern, Surveys of Consumers Chief Economist Richard Curtin said.

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Consumer sentiment rose to 93.2 in September, following a drop to 89.8 in August from 98.4 in July that signaled growing concerns over a possible recession, according to Deborah Weinswig, CEO of Coresight Research. Sentiment remains 6.9% lower, however, than the same month a year ago, according to the index.

The U.S. can strengthen consumer confidence and send positive signals to markets and trading partners by passing the U.S.-Mexico-Canada Agreement and resuming trade talks with China, NRF's Shay said. Top U.S. and Chinese officials are due to meet Oct. 10-11 in Washington, D.C.

A potential presidential distraction

Experts disagree on whether the onslaught of political news surrounding the impeachment inquiry into Trump will divert consumers' attention from holiday shopping.

In an Oct. 1 report, Weinswig said impeachment proceedings could pull consumers' attention to politics instead of holiday purchase plans.

Sweet, however, said the distraction would not have a material effect on consumer spending during the holidays.

"What really matters is the labor market, wages, how the stock market is doing for high-end consumers. That will more than offset the headline coverage about the impeachment process," Sweet said.

A smaller piece of the sales pie

Many retailers are booking a smaller share of annual sales from the holiday season as online shopping allows consumers to spread out purchases over the year, Weinswig said. Top retailers including Walmart Inc. and Target Corp. have launched sales events during the summer months to compete with Amazon's Prime Day.

Holiday sales represented 21% of total annual sales for retailers in 2018, down from 21.3% five years earlier. The level has dropped since 1998 when the holiday period accounted for 23.7% of retailers' annual sales.

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Holiday sales for jewelry stores dropped to 26.7% from 33.4% of total annual sales over a 20-year period, while department store holiday sales fell to 23.8% from 24.6% in the same period, according to an Oct. 1 Coresight Research report.

The drop in holiday sales, however, has been very minimal, and the period continues to be a very important season for retailers, Sweet said.