The U.S. retail industry has had its share of ups-and-downs this year. After a disappointing start, it managed to regain its bearing in the second quarter. Then came hurricanes Harvey and Irma. With the impact of these hurricanes on the economy and consumer spending, the retail sector is now looking to the upcoming holiday season to help atone for a challenging year.
Released each month by the U.S. Department of Commerce, the Retail Sales data consists of receipts from the sale of durable and non-durable goods and services to consumers. The data includes traditional retail stores, food and beverages, clothing, autos and gasoline, among others, for all in-store, catalog and internet sales. The significance of retail sales is that it represents almost half of all consumer spending. Consumer spending is the cornerstone of the American economy, accounting for more than two-thirds of all U.S. economic activity.
In 2016, the retail holiday season — the 61 calendar days in November and December — generated a massive $658.3 billion in sales, excluding automotive dealers, gas stations and restaurants. For American retailers, the holiday season represents, on average, 20 percent of their entire annual sales. It can generate nearly 10 times the sales than the industry’s second largest shopping holiday, the back-to-school season.
As the economy enters the closing stretch of the year, retailers will be looking to build off the positive, yet choppy results of the past few months. Retail sales data for September reported a 1.6 percent increase from the prior month. This was the largest monthly gain since March 2015 and much improved over August’s 0.1 percent decline. September’s year-over-year growth was a stellar 4.4 percent. Core retail sales, which excludes the volatile auto and gas components, increased by 0.5 percent in September, beating August’s increase of just 0.1 percent.
However, much of September’s surge can be attributed to hurricanes Harvey and Irma, which hit the southern U.S. in late August and early September. As August’s retail sales were decidedly weak from the weather-related impact, September’s data was driven higher by the subsequent replacement demand and reconstruction efforts for flood-damaged cars and building materials.
Despite September’s boost in retail sales, the greater picture remains the continuing landscape of the U.S. economy. In the second quarter, the economy grew at an annualized rate of 3.1 percent, the fastest pace in over a year. A key driver of this growth was consumer spending, reflected in part by a now-stabilized retail sector. The first glimpse into the economy’s third quarter results won’t be released by the U.S. Department of Commerce until October 27. However, due to the hurricanes’ impact, both the Federal Reserve and the financial markets have lowered expectations for third quarter growth to around 2.3 percent.
But the U.S. retail industry has some economic tailwinds as it enters the fourth quarter. First, the weather-related impact to consumer spending and economic growth should be transient and made up for in the upcoming months. In fact, the Fed just raised its projected 2017 economic growth rate from 2.2 percent to 2.4 percent. Admittedly, the upward revision is still below the 3 percent growth rate typical of a healthy economy, but it is an improvement over the current eight-year average of just 2.1 percent.
The labor market continues to remain strong. The national unemployment rate is at 4.2 percent, its lowest since February 2001. Despite a loss of 33,000 jobs in September, the first monthly decline in seven years, the hurricane-related decline is temporary, and robust demand for labor should resume.
As always, the key is the American consumer, who’s spending is the inherent driver of the U.S. economy. According to the National Retail Federation, holiday sales this season should grow by 3.6-4 percent from 2016, slightly above the 5-year annual growth rate of 3.5 percent. Fortunately, American consumers continue to remain confident on the state of the economy. The Consumer Confidence Index, a key measure of consumer optimism on jobs and income, remains near a 16-year high. But the big question that remains is — will this optimism translate to spending? As the holiday season rapidly approaches, the retail industry will be hoping that consumers solidify their holiday cheer at the checkout line.