The Current, delivered daily.
Welcome to a new week. Holiday shopping is settling in for the long and steady push between the Thanksgiving weekend bonanza and an expected big finish. Given the importance of the season and how closely brands and retailers will be monitoring consumer activity as a result, let’s start this week with quick takeaways from the economy issued last week:
Inflation is showing signs of cooling. As in this month’s Consumer Price Index, Inflation showed signs of easing in the Fed-preferred PCE price index, which was released Thursday. The 6% year-over-year price increase in October was the lowest since December 2021, as durable goods in particular came down, according to the US Bureau of Economic Indicators. Core inflation, which excludes food and energy, has been more stable in recent months, running around the 5% level seen this month.
Change in PCE Price Index, ex. food and energy (Source: US BEA)
Consumers saw an uptick in money to spend. Personal income increased 0.7% for the month, while disposable income saw the same increase, according to the PCE. However, the overall savings rate is continuing to decelerate coming out of pandemic lockdowns, as personal savings as a percentage of disposable personal income was 2.8%. This measure reached 17% in 2020.
People are still buying. Consumer spending increased 0.8% month-over-month, offering an indication that people continue to open their wallets amid price increases and talk of a worse economy ahead. Given the falling savings rate, however, they could be financing more holiday gifts with credit cards and installment options through Buy Now Pay Later, the latter of which saw a surge in use over Black Friday weekend.
But they aren't feeling great about things. According to the Conference Board, consumer confidence fell for the second straight month in November. “Inflation expectations increased to their highest level since July, with both gas and food prices as the main culprits. Intentions to purchase homes, automobiles, and big-ticket appliances all cooled. The combination of inflation and interest rate hikes will continue to pose challenges to confidence and economic growth into early 2023," said Lynn Franco, senior director of economic indicators at The Conference Board, in a statement.
Personal Consumption Expenditures, 2018-present. (Source: US BEA)
The job market continues to roar. The monthly jobs report issued Friday by the US Bureau of Labor Statistics delivered its latest in a string of strong metrics. Employers created 263,000 new jobs in November, and the unemployment rate remained unchanged at the historically-low 3.7%. However, the labor force participation rate continues to hold around 62%, which remains well below pre-COVID levels. Economists expected this number to rise with reopening, but that hasn’t happened. Fed Chair Jerome Powell said Wednesday that a significant driver of this was excess retirements, as well as falling immigration and deaths from COVID-19.
Total nonfarm payrolls, 2018-present. (Courtesy photo)
What does it say about the consumer? Mostly good news, for a change. There are plenty of worries to go around about the economy at a time of high inflation rates and Fed interest rate hikes that are supposed to cool demand. But it continues to be an economy where people say one thing, and do another. They may not be feeling good about things, but this week’s data showed people are still buying, and the robust labor market is providing stability that allows them to continue to do so. As feared by many, this picture is expected to get cloudier heading into next year. But consumer spending is expected to remain intact, wrote National Retail Federation Chief Economist Jack Kleinhenz.
“Employment will still be growing, and consumer spending should remain positive,” Kleinhenz wrote. “There will be economic hardships, and some may feel like they’re in a recession. But for those who have jobs and feel secure about their employment, careful spending will continue.”
The latest data to be released looks backward at months already gone by, so it’s tough to extrapolate exactly what it means for the holidays. But there are some signals there that things were looking up at just the right time, and growth in spending and traffic over Black Friday-Cyber Monday offered more evidence that holiday shopping remains in high demand.
Retail executives were mostly reticent to provide too many details about results for the holiday season kickoff on earnings calls last week, but Victoria’s Secret CEO Martin Waters offered the following take, according to a Seeking Alpha transcript:
The start of November up until the Black Friday weekend seemed to be very much a continuation of the trend from the third quarter, a reflection of a very cautious customer in a challenging economic environment. However, since Black Friday, our customers have responded positively, and we've been very pleased with an uptick in the trend and our level of performance. Our stores have been some of the busiest in the mall, and our promotional levels were appropriately aggressive with increased traffic and conversion both in stores and online.
Consumers have mostly continued to spend despite all the headwinds throughout the year. The holidays may not be any different. The scale of the holiday season makes it a great place to see how economic trends are playing out on the ground. So the results for the season may prove to be one of the most important indicators of them all.
What does it mean for the Fed? That’s a trickier question. While continued demand is ostensibly good for the economy, The Fed actually wants to see demand shrink, and thinks it will be necessary to bring inflation down. But the data isn’t showing that happening, especially in the labor market. At the same time, the central bank has been publicly raising expectations that it is considering pulling back the size of the next interest rate hike from 0.75% to 0.5% at its meeting next week. Data showing continued spending and a tight labor market could make the messaging behind such a move a more difficult needle to thread. However, the ease-up of inflation – which is the whole point of the rate hikes – could indicate that its moves are working. But so far, that cooling has only been observed for one month.
“Down months in the data have often been followed by renewed increases. It will take substantially more evidence to give comfort that inflation is actually declining,” Fed Chair Jerome Powell said in a speech last week at the Brooking Institution.
Powell said rates are going to go up again, but he was more equivocal on the question of how much they will rise this month saying only that, “The time for moderating the pace of rate increases may come as soon as the December meeting.” In the long-term, Powell said the more pressing question is how high interest rates need to go, and how long they need to stay here. In other words, this will take a while.
Now, here’s a look at the data set to be released this week:
Consumer Credit: The Federal Reserve issues its monthly report on credit card balances, auto loans and other forms of outstanding credit that must be paid down. (Wednesday, Dec. 7, 3 p.m.)
Producer Price Index: The US Commerce Department releases data on the price of goods before they reach retail. Also known as the wholesale price index, this serves as a forward-looking measure of inflation. (Friday, Dec. 9, 8:30 a.m.)
Consumer Sentiment: The University of Michigan Survey of Consumers offers a preliminary monthly look at consumer expectations and outlooks for buying and inflation, among other areas. (Dec. 9, 10 a.m.)
Tues., Dec. 6: Stitch Fix, Signet Jewelers
Wed., Dec 7: Campbell Soup Co., Rent the Runway, Vera Bradley, Lovesac, United Natural Foods
Thurs., Dec. 8: Chewy, Costco, Lululemon, RH
Trending in Economy
On average, customers spend $59 more than the value of their gift card, Fiserv found.
In retail, sales are often measured in goods, whether they are purchased for ourselves or someone else. There are plenty of strategies that brands and retailers use to increase those sales, whether it is marketing, loyalty programs or how that item is presented.
In most cases, these are two different parts of the equation for retailers: The product that is bought and the strategies that lead to the purchase.
That’s what makes the gift card unique.
It is an item you can buy, with a section in the store all its own. Eventually, it leads to the purchase of other goods, so the gift card is leads to a direct sale. Yet it’s also a means to build a retail brand and create incentives that both introduce customers to a store and keep them coming back.
That’s a key takeaway from the 20th Annual U.S. Prepaid Consumer Insights Study from fintech and payments company Fiserv.
At this point, the gift card feels like a staple of the shopping experience. But it is only about 30 years old. In 1994, Blockbuster Video pioneered the sale of cards for gifted purchases directly as a means to combat fraud in paper gift certificates. Since then, they’ve proven to have a multitude of uses that stretch beyond the holidays.
Starbucks and Amazon gift cards are commonly distributed as prizes at team-building events and as pick-me-ups by friends showing they care. In 2022, 60% of consumers said they received a gift card from an employer, according to the Fiserv report. That was a big increase from 32% in 2019. People appreciate the gesture. The survey found that 85% of employees think that gift cards from an employer make for appropriate incentives.
For people looking to show generosity, gift cards can also be a means to stretch dollars. At a time of high inflation, people are looking for deals with their discretionary purchases. Gift card promotions that offer discounts and bonuses are proving particularly popular, the study found. Two-thirds of consumers said promotions can influence them to purchase more, while more than half of consumers took advantage of such an offer in 2022.
Yet the more difficult consumer environment is also having an impact on overall gift card sales. In 2022, the growth of gift card purchases slowed.
“Overall, 56% of U.S. consumers purchased more gift cards in 2022 compared to 2021,” said Tom Niedbalski, VP of gift solutions at Fiserv. “This was a decline from the 73% of consumers who said they bought more gift cards in 2021 than they did in 2020.”
Inflation and less discretionary income were the driving factors for consumers who said they bought fewer gift cards during 2022, as 35% of consumers said inflation was the reason they were purchasing fewer cards.
It's important for brands and retailers to understand why consumers buy gift cards. But it's just as crucial to understand where they can fit in retail strategy. Beyond sales, gift cards can help drive repeat customers, and extend a brand. These tools are particularly valuable at a time when retailers are focused on profitability in a tougher consumer environment.
Fiserv explained four areas in which gift cards are of particular value for brands.The following is directly quoted from Niedbalski:
Improving cash flow and revenue. Gift cards not only drive in-store and online traffic, there is an associated “lift,” or overspend, when a gift card is converted into a sale. On average, customers spend $59 more than the value of their gift card.
Repeat customers. Retailers use gift cards to foster loyalty and customer engagement, ultimately leading to repeat customers. One way we see this play out is through promotions associated with gift card sales. For example: a consumer who buys a $100 gift card for the holidays will receive a $20 bonus card that can be used after January 1 – creating a pre-holiday sale and post-holiday transaction in the New Year.
Branded currency. A gift card places a merchant’s brand directly into the consumer’s wallet, increasing brand awareness and ensuring the merchant’s brand is with the consumer when they are looking to buy.
Year-round marketing. The gift card has grown beyond the traditional holiday season. From birthdays and graduations to anniversaries and babies, gift cards are becoming the most popular way to recognize milestones – giving retailers opportunities to run additional promotions throughout the year.