Down the Chimney St. Nicholas Came with a Bound…in October
Christmas came early for many consumers in the U.S. this year, and that may have created an illusory drop in inflation and retail spending.
You may have noticed a change in your own spending. In recent years, U.S. consumers have been doing a considerable amount of their holiday shopping earlier than in the past. A Gallup poll taken in September found that 41 percent of U.S. holiday shoppers intended to start their shopping before November.
Gallup reported:
As trends this year shift toward retailers launching holiday sales, promotions and deals earlier, more than one in four holiday shoppers (28%) would consider starting their shopping earlier than usual.
Young adults are especially open to being persuaded to start sooner if the holiday deals were rolled out earlier. Nearly half of young adult holiday shoppers, 48%, say they would definitely or probably start earlier. This emphasizes the potential impact of retailers’ early initiatives on consumer decision-making, especially young adults, and the need to cater to evolving customer preferences.
Many of America’s biggest retailers launched major holiday discounting campaigns to win over these shoppers and encourage early shopping. Amazon held an October version of its Amazon Prime Day that it dubbed “Big Deal Days.” Walmart’s “Holiday Deals Kick Off” began with an event that ran from October 9 through 12. Target offered what was described as”Black Friday-type discounts” in early October.
“These deals are expected to attract plenty of shoppers. A recent survey from Bankrate found 50 percent of people plan to buy holiday gifts before Halloween,” CBS News reported.
Yet according to the Department of Commerce, retail sales declined in October. The government’s monthly report on retail sales recorded a 0.1 percent decline in retail sales, the first decline since March. The Wall Street Journal said that consumers were “tapping the brakes on economic growth ahead of the holiday shopping season.”
Sales fell at department stores and in the category that includes sporting goods, hobby, musical instrument, and book stores. Sales were flat at clothing stores. These are exactly the kind of stores that were attempting to lure in buyers with all those early holiday discounts. So, what happened?
The retail sales figures are not adjusted for changes in price. If retailers slashed prices on goods to attract early holiday shoppers—and those consumers spent the savings on services, or put it away in the bank, or paid down debt—then this would show up as a decline in nominal sales in the month.
Data on air travel suggest that consumers were not quite tapping on the brakes in October. Starting around September, the number of people going through Transportation Security Administration (TSA) checkpoints began to consistently exceed prepandemic levels for the first time. As Bank of America’s U.S. economics team has recently argued, this TSA “throughput” can provide a useful metric for the consumer that is not subject to price level distortions.
From Bank of America‘s “Holiday hugs are good for the economy” report on November 29:
We see three reasons why TSA throughput is a useful measure of the pulse of the consumer. First, it is “inflation adjusted”, since it measures the number of flyers rather than dollar spending on air travel. Second, a lot of air travel is discretionary. In previous reports we have pointed to robust spending growth this year in (discretionary) durable goods as an indication of consumer resilience. The TSA data are sending a similar signal. Third, air travel is mechanically linked to other types of discretionary spending, e.g. hotels, restaurants and entertainment.
In other words, there’s at least some suggestion in the travel data that consumers are not pulling back on spending so much as shifting their consumption.
Disinflation Tarnished with Ashes and Soot
The Commerce Department’s report on personal consumption expenditures (PCE) showed that household spending rose 0.2 percent in October—both in real and nominal terms. According to the Commerce Department’s PCE price index, inflation did not rise at all in October, so the nominal and real figures are the same.
The Labor Department’s report on household inflation, the consumer price index (CPI), also was flat for the month. This was widely greeted as a welcome sign that our long battle with inflation may finally be coming to an end. Or, at the very least, that inflation was now headed back toward two percent—the Federal Reserve’s target—instead of remaining stuck at three or four percent.
Those early holiday discounts, however, may have made the October inflation figures misleading. Both the PCE inflation and the CPI indexes use the Labor Department’s seasonal adjustments to price data. These seasonal adjustments ordinarily would reduce or eliminate the effect of temporary price declines due to holiday sales, preventing the inflation indexes from falsely indicating disinflation or even deflation. This works the other way also: when certain goods or services have predictable “hot” seasons that drive up prices, the government rubs away some of the increase to give a more accurate picture of how the economy is developing.
The trouble is that shifts in consumer and merchant behavior take several years to get incorporated into the seasonal adjustments. Five years is probably the minimum. Often it might take as many as eight years of data to convince the Labor Department’s greenshades to adjust the seasonal adjustment.
So, when holiday discounts are suddenly happening in October instead of Black Friday in November, they do not get “seasonally adjusted” out of the figures. A decline that might have been seasonally adjusted away if it came in December largely makes it into the seasonally adjusted figures if it happens in October. As a result, the seasonally adjusted figures can produce a misleading picture of disinflation when what we’re really seeing is early holiday discounts.
In the long run, this should not matter. The seasonal adjustment “error” will even out over the course of the holidays because the price reductions from October through November and November through December will be smaller than they otherwise would have. This creates the opportunity for an upside surprise in inflation for November and December.
In the short run, it is possible that October’s inflation figures were flattered—and the retail sales figures dampened—by the change in the calendar of when people shop and merchants discount their goods. We’ll know more when we get the November inflation figures beginning next week with the Labor Department’s report on CPI.