What to expect

From Oxford Economics:

■ Holiday sales to register a small advance this year, up only 0.6% y/y.
While phase one of the recovery proved that fiscally supported incomes can fuel potent spending on goods, we shouldn’t fall for alluring rearview-mirror economics. Phase two of the recovery is significantly slower, with muted employment gains and reduced fiscal aid weighing on incomes. Plus, a worsening Covid outbreak is once again limiting activity across the country.

■ This holiday sales forecast is susceptible to greater uncertainty than usual, with risks skewed to the downside. In particular, big unknowns include the trajectory of the third Covid wave, the distribution of personal savings across lower- and higher-income families, and higher-income families’ propensity to shift traditional spending on services toward goods.

■ The downside scenario sees retail sales falling 1.4% y/y as families across the nation grow increasingly fearful and restrain their outlays in response to reduced income momentum. The upside scenario foresees retail sales rising 1.1% y/y, still the lowest since 2009, as households partially discount the worsening health situation and angle spending more toward goods.
The US health situation is going from bad to worse, and this will have important consequences on economic activity in coming weeks, especially in the absence of additional fiscal stimulus. Below-consensus 0.6% y/y call for holiday sales growth – November and December retail sales excluding autos, gas, and restaurant services – reflects a resurgence of Covid- 19 hospitalizations and deaths, gradually cooling income growth, souring consumer confidence, and rising inequality. A strong equity market performance, elevated savings among higher-income families, and encouraging vaccine news all bode well for economic activity in 2021, but their effects will be limited this holiday season.

The good, the bad and the predictable:

The uncontrolled surge in the number of new daily Covid-19 infections, now above 150,000, has unsurprisingly led to a record number of hospitalizations – 10% higher than their prior two peaks (Figure 2). The resulting rise in virus fear and renewed social distancing measures are constraining sentiment and weighing on mobility and spending.
Household income is gradually falling back toward its pre- Covid level as fiscal aid no longer offsets the 10 million jobs shortfall relative to February and capped wages.
In this environment, the recovery’s fragilities are becoming apparent. While lower-income families drove the rebound in consumer spending during the recovery’s first phase, they’re likely to cut back if the second phase doesn’t feature as much, or any, additional fiscal support in the form of government transfers. Such a pullback would predominantly constrain retail and holiday sales since higher-income families tend to dominate spending on services.
And while the national savings buffer is large, with the personal savings rate at 14.3%, it would be incorrect to assume that this represents an evenly split lump sum across all families. Evidence from the JPMorgan Chase & Co. Institute indicates that most of the unemployment benefit savings had been depleted by summer’s end. As such, we believe most of the excess savings are currently held by higher-earning families and families less affected by the crisis who’ll have a lower marginal propensity to spend their savings.

Similarly, the remarkable equity market gains in recent weeks could be perceived to represent strong support to discretionary holiday spending. But, we caution that the capital gains are predominantly going to higher-income families and that the wealth effect is minimal.

While some holiday spending may get reallocated away from services – travel, arts and recreation, dining out – and toward retail sales, this will likely only be partial. Similarly, online sales won’t offset the anticipated softness in holiday sales since large retailers have front run the holiday season with early Black Friday and Prime Day sales.

Given the unusual Covid circumstance, we developed a range of potential outcomes. Our downside scenario sees retail sales falling 1.4% y/y as families across the nation grow increasingly fearful and restrain their outlays in response to reduced income momentum.

The upside scenario foresees retail sales rising 1.1% y/y as households partially discount the worsening health situation and shift some of their traditional service sector outlays toward goods.

Oxford sees a concerning health situation, reduced fiscal aid will constrain incomes and spending, and expects strength in online sales won’t suffice to offset weakness in holiday shopping


Debt deflation?

Increasing public sector debt can be misleading because it can still rise during deflation. Private sector debt is where the real focus should be and private sector debt, it is true, has also expanded this year as corporates have sought to shore up balance sheets and extend debt maturities in an effort to survive the economic implosion. But the clue to debt deflation comes in that observation. This increase in private sector debt is not healthy, self-liquidating debt which, for example, would come from borrowing to invest in a new factory, the debt being paid off via the increased production. No, this is unhealthy, non-self-liquidating debt which is being added and the same is true for U.S. households’ binge on mortgage debt.

Debt-bubble-deniers state that the level of debt is not a problem as long as the debt can be serviced. Sounds plausible but the ability to service the debt requires income, and income relies on a growing economy. This is why the only policy of the Fed and other central banks is to continually (try to) pump up the economy on any sign of deflation with counterfeited money. They started digging this hole for themselves twenty years ago and are now so deep in it that the only option they have is to keep digging. At some point, though, they will reach solid rock and all digging will have to cease. That’s when reality will dawn and the debt bubble will be able to deflate unhindered, driven by a negative trend in social mood.

On Wednesday, the Institute of International Finance (IIF) issued a research report stating that its measure of total global debt has risen dramatically this year and it expects the total to exceed $277 trillion will equate to around 365% of global Gross Domestic Product, up from 320% at the end of 2019.

The debt bubble just keeps inflating. This week’s debt statistics make for ugly reading if you’re a believer in sound economics. On Tuesday, the Federal Reserve Bank of New York reported that household debt in the U.S. reached a new record of $14.35 trillion in the third quarter, fueled by a boom in mortgage refinancing. Households are not only taking advantage of lower interest rates to refinance existing mortgages but are adding debt in the process. I mean, with rates near zero and the Fed saying that they will stay there, then why not leverage up huh?

When will this madness end and debt inflation turn to debt deflation? Well, the IIF stats are skewed by the incredible increase in public sector debt as governments have borrowed to mitigate the fall-out from pandemic lockdowns and the cratering of economic activity.