Consumers Snapped Up the Deals But How Long Can the Spending Continue?

The turkey is gone as are the relatives. The football games have been watched.

But Americans did find time over the Thanksgiving holiday weekend to do a little shopping.

Early estimates from Mastercard’s SpendingPulse showed overall spending was up 2.5%, while a separate report from Adobe Analytics pegged Black Friday online sales up by 7.5% to a record $9.8 billion. Key categories included toys, electronics, cookware and skin care items.

“The strong online sales momentum for Black Friday this year further emphasizes the staying power the major holiday shopping days continue to have,” said Vivek Pandya, lead analyst at Adobe Digital Insights. “Consumers still expect the best discounts during these days and retailers are delivering, which is why we anticipate a record $37.2 billion sales during Cyber Week (5 days from Thanksgiving to Cyber Monday).”

Another report from online fraud detection company Signifyd put the sales increase for Black Friday at 6%. Retailers are hoping Cyber Monday will also boost that total. A lot of the spending was driven by deals and buy-now, pay-later programs.

“Not surprisingly, discounts played a major role in increased ecommerce sales on Thanksgiving Day, with the number of orders accompanied by a discount up 41% over a year ago,” according to Signifyd.

The spending spree will be a nice headwind going into the critical end-of-year season for the retail sector of the economy. While the third quarter was a barn burner for the economy – with an updated reading of potentially 5% annual growth due out Wednesday – there are expectations the fourth quarter might bring a slowdown.

The week kicks off with new home sales for October on Monday, but the updated report on gross domestic product for the third quarter and the personal consumption price expenditures index, a key inflation metric followed closely by the Federal Reserve, coming on Thursday will likely be the highlights. The October PCE is expected to show a continued decline in inflation.

The Fed’s “beige book” report on the economy is out on Wednesday, and that will show how inflation is affecting businesses and consumers. The pace of annual price increases has fallen by about two-thirds, to 3.2%, since the peak in the summer of 2022. But consumers continue to express concern over inflation that has left overall prices higher by about 18% since 2021.

“With inflation falling as the Fed keeps rates unchanged, real interest rates continue to tighten,” said Richard de Chazal, macro analyst at William Blair. “That’s fine with the Fed for the time being, particularly with financial conditions continuing to ease. However, as we move further into 2024, pressure will only increase for these declines in inflation to be followed with rate cuts.”

Part of the reason the economy is expected to slow in the new year is that higher interest rates from the Fed come with a lag effect. The market believes the central bank raised rates for the final time of this cycle in July, but there are differences as to when it might begin to start cutting.

“Showing surprising resilience throughout the year, we believe consumption growth is slowing in the final quarter of 2023 and will continue on a downward path throughout 2024,” economists at Wells Fargo’s corporate and investment banking group wrote on Sunday. “Weaker income growth, dwindling savings, costlier credit and resumed loan payments should slow spending in the first half of next year.”

Helping the Fed is the recent decline in oil prices and the resultant drop in gasoline prices that are now at or below $3 a gallon in many states. The belief that the Fed is done has also driven down yields on Treasurys and, with them, mortgages.

But consumers remain concerned about inflation and just how much will be seen on Tuesday when the Conference Board releases its consumer confidence index for November.

“I think 2023 was definitely a testament to the resiliency of the U.S. economy,” says Matt Stucky, vice president and chief portfolio manager for equities at Northwestern Mutual. In particular, Stucky adds that the buoyancy of the labor market has been a key ingredient in keeping consumer spending going. “The question is going to be how long can this last? Our thesis is that we are running out of slack.”