Announcement

ADP Research Institute (ADPRI) and the Stanford Digital Economy Lab (the “Lab”) announced they will retool the ADP National Employment Report (NER) methodology to provide a more robust, high-frequency view of the labor market and trajectory of economic growth. In preparation for the changeover to the new report and methodology, ADPRI will pause issuing the current report and has targeted August 31, 2022, to reintroduce the ADP National Employment Report in collaboration with the Stanford Digital Economy Lab (the “Lab”). We look forward to providing an even more comprehensive labor market analysis and will be in touch with additional details closer to the re-launch, later this summer.  For more information on this announcement, please visit here.

The Holiday Shuffle

December 06, 2021 | read time icon 8 min

Nela Richardson, Ph.D.
Share this

Shopping becomes the national pastime at this time of year. In the weeks between Thanksgiving and Christmas, spending by holiday gift-buyers accounts for nearly a third of the year’s retail sales.

And the National Federation of Retail projects that this season could be retail’s biggest ever, with sales rising as much as 10% from last year to hit nearly $860 billion. That’s a lot of ugly reindeer sweaters.

How is that even possible? As we’ve discussed before, the big three of inflation, labor shortages, and supply chain bottlenecks have made shopping more expensive.

But higher prices don’t necessarily curb spending. In fact, it might increase it. You read that right.

Here’s why the big three are triggering big spending on Main Street  – and one big reason to be worried about it.

Trigger: Inflation 

Response: Investment in big-ticket items

Inflation erodes the dollar’s purchasing power, meaning money doesn’t go as far as it used to. If people expect prices to keep going up, or rise even faster, they might stock up now on durable goods that tend to hold their value over time.

The New York Federal Reserve’s monthly Survey of Consumer Expectations asks Main Streeters what they think inflation will be over the next year. In October, the survey showed that consumer inflation expectations rose for the 12th consecutive month, to a new high of 5.7%. 

Since the start of the survey in 2013, inflation expectations have hovered around a much more humble 3%.

Source: New York Federal Reserve

Spending on durable goods is up over 30% from pre-pandemic levels. It peaked after the March round of direct federal payments to households this spring and is now trending up again. That means long-lasting items like electronics, bicycles and furniture might be this season’s top gifts. (Note to husband: Diamonds are forever).

Trigger: Supply and labor shortages

Response: Stocking and shopping early

Supply bottlenecks and labor shortages have been pervasive as the pandemic continues to limit the flow of people around the world and the movement of goods from ports to store shelves.

Large retailers responded early to the shortages and stocked up well in advance of the holidays. They hired aggressively and boosted pay to retain workers.

It worked.  You might have noticed that holiday décor went up as soon as Halloween passed. Consumers started shopping earlier this year, trying their best to avoid long lines and shipping delays. 

In November, the National Federation of Retailers reported that about half of Americans already had started their holiday shopping before Thanksgiving (my mom likely one of them). Retail sales in October soared 15% to the highest level ever.

Labor shortages in transportation and warehousing are pervasive, but most jobs in retail that were lost to the pandemic have come back. Retail employment plunged 13% in the early days of the pandemic, but the jobs in the sector now are less than 1% below pre-pandemic levels.  

Retail jobs declined last month, a sign that employment may stall out at current levels as consumers shift their spending to online shopping.

On a personal note, employment in the shops where I‘ll be buying gifts for my husband and two sons – including sporting goods, hobby, book, and music stores — is still down 8% from pre-pandemic levels.  The hunt is on!

Trigger:  Omicron variant

Response:  Buying more goods, fewer services

Even concerns over new COVID-19 variants won’t likely make a dent in retail sales, for two reasons.

First, coronavirus concerns continue to shift rather than slow consumer spending. Online shopping remains stronger than it was pre-pandemic, as consumers shop from the comfort of home while working or baking holiday cookies. It’s a win-win in my book.

Second, consumers have been buying stuff rather than services like restaurant meals, concerts or travel. A resurgence of the pandemic likely would amplify these trends.

Two of my ADP colleagues already have canceled or are considering canceling overseas holiday travel due to the Omicron variant. That’s not a large sample size, to be sure, but it’s demonstrative of the trade-offs consumers are making amid continued health concerns.

My Take

Retail therapy is in high demand. Confronted with rising inflation, shortages and pandemic worries, people still are ready and willing to spend.

Here’s the problem. A massive infusion of government aid had Americans well-positioned to maintain their robust pace of spending at the start of this year. Now that those pandemic relief programs have expired, Main Street is borrowing to fund its spending.

Since the end of last year, consumer debt has grown by $1.1 trillion. Credit card balances this fall were up $17 billion from the previous quarter according to the New York Fed.

Consumer debt as a share of household income remains low, but it’s rising. Instead of paying down debt like they did earlier in the pandemic, Americans are adding to it.

So while holiday shopping might seem impervious to inflation, shortages and pandemic concerns, debt could be the Grinch that crimps spending next year.