Respectable holiday sales could be an early signal for how the economy fares next year

Economic lore says that the holiday shopping season is a harbinger of how well the economy will do in the new year. It is prudent not to rely on any single indicator to predict the economy’s prospects, but if I had to pick one, this would be high on the list.

Holiday sales aren’t as important as they once were in determining retailers’ fortunes, as consumers have many opportunities to shop year-round, but they remain a clear window into the American consumer’s state of mind. And as long as consumers do their part, neither spending with abandon nor being overly cautious, the economy will do just fine.

So, how did retailers do this season? While they are still tallying their sales, it appears they were up nearly 4% from last year, according to Moody’s Analytics data. A respectable performance. It wouldn’t be surprising if this was ultimately an apt description of how the economy fares in 2024.

People are out shopping because they can. Everyone who wants a job has one. Despite seemingly incessant calls that the economy is headed into an imminent recession, business executives have ignored them. They continue to hire and are loath to lay off.

Unemployment also remains steadfastly below an extraordinarily low 4%. The last time it was as low for so long was more than half a century ago. And it’s low across genders, ages, educational attainment, and ethnicities, despite a large influx of people coming into the labor force wanting work.

With the tight job market, businesses have been paying their workers more, and wages have risen meaningfully faster than inflation all year. That is, workers’ buying power is improving. Somewhat surprisingly, this is true across all low- and high-paying wage groups.

Adding to this is the extra savings many Americans acquired during the pandemic. For more than a year, we couldn’t go out to eat, attend ball games and concerts, or travel as we typically do, so we saved, much of which is sitting in checking accounts and money market funds. We’ve been drawing down this cash ever since, using it when needed to keep spending.

Record-high housing values and stock prices have also been a boon to the almost two-thirds of Americans fortunate enough to be homeowners and shareholders. Since the pandemic, the typical household has seen its net worth — the difference between what is owned and what is owed — increase by almost $50,000, after accounting for inflation. Wealthier households make more confident shoppers.

Even the surge in interest rates since the Federal Reserve began raising rates two years ago hasn’t bothered many. Households generally did a good job of locking in the record-low interest rates during the height of the pandemic by paying down their higher-cost credit card debt and refinancing their mortgages. The typical homeowner with a mortgage has a rate of only 3.5%.

At this point, you’re probably asking, if everyone is in such good financial shape, why are holiday sales and the economic outlook only respectable? Why aren’t they great?

The answer involves the one-third of Americans who don’t own homes and certainly don’t own stocks. They have turned to credit cards and so-called “buy now, pay later” loans to help pay bills that have gotten much bigger from higher inflation. The cost of almost everything, particularly staples such as food and rent, is up substantially from just a few years ago, leaving little for holiday gifts.

Sales this holiday season were respectable as the wealthiest one-third of Americans are doing well. The well-to-do account for almost two-thirds of overall spending. While those in the bottom one-third of incomes account for only one-tenth of all spending, the economy can’t flourish unless all Americans are doing well financially.

Also holding back shoppers this holiday season has been a general ennui about the state of their finances. Upbeat economic statistics notwithstanding, many remain unconvinced. The collective psyche was understandably pummeled during the pandemic, but it has yet to bounce back. Americans may have had the wherewithal to spend more this holiday season, at least in the aggregate, but they weren’t confident enough to do so.

The fate of future holiday seasons and the economy rests on improving the financial fortunes of all Americans. This requires unemployment to remain low, about where it is today, and for inflation to throttle back a bit more. Fortunately, all the trend lines look good. I’m optimistic that the current pessimism is set to fade away.