Holiday spending rose, defying fears of a decline

Despite persistent inflation, Americans have increased their spending this holiday season, early data shows. That comes as a big relief to retailers who spent much of the year fearing the economy would weaken quickly and consumer spending would fall.

Retail sales rose 3.1 percent from Nov. 1 to Dec. 24 compared to the same period a year earlier, according to data released by Mastercard on Tuesday. The credit card company’s figures have not been adjusted for inflation.

Spending rose in many categories, with restaurants making one of the biggest jumps: 7.8 percent. Clothing rose by 2.4 percent, and groceries also made gains.

Holiday sales, driven by a healthy labor market and wage increases, indicate the economy remains strong. The Federal Reserve’s campaign to rein in high inflation in recent years by raising interest rates has slowed the economy, but many economists believe a so-called soft landing is within reach.

“What we’re seeing this holiday season is very consistent with how we think about the economy, which is that it’s an economy that’s still growing strongly,” said Michelle Meyer, Mastercard’s chief economist.

Solid job growth allows people to spend more. And while consumer prices have risen sharply over the past two years, wages have risen faster overall.

“We are now entering the period, and to some extent we see this during the holiday season, where consumers have built up real purchasing power,” Ms. Meyer said.

Spending in categories such as electronics and jewelry is still down this season. And the growth rate of spending has been moderate in recent years. According to the National Retail Federation, holiday retail sales increased 5.4 percent in 2022. In 2021 they rose 12.7 percent, the largest percentage increase in at least twenty years. Online sales growth has also slowed in 2023, up 6.3 percent compared to 10.6 percent from 2021 to 2022, Mastercard said.

While the economy is generally strong, Americans are increasingly mindful of their spending, and that discretion has shaped the shopping season.

Some retailers had expressed concern in recent months that shoppers seemed gloomy and anxious about the economy. Walmart and Target noted that shoppers seemed to wait for sales before purchasing, a change from recent years when they spent more freely.

“The caution they have taken with their spending and what they are spending on is really noticeable in the second half of the year, where many customers have been affected, especially lower and middle income ones,” people said. Jessica Ramírez, retail research analyst at Jane Hali & Associates.

In a return to some pre-pandemic trends, many retailers and brands offered promotions. The discounts were between 30 and 50 percent, Ms. Ramírez said. But the discounts were more targeted this year than last year, because fewer companies were saddled with excess inventory.

Categories that saw sales declines this year – such as electronics, home furnishings and toys – saw some of the biggest discounts in the run-up to Christmas. Those goods saw booming sales during the pandemic.

Alexan Weir, a 30-year-old mother from Orlando, Florida, said she was pleased to see deals on toys when she bought Christmas gifts for her daughters this month. Among the items she purchased at Target were the Asha doll, based on the main character from the Disney film “Wish”; an Elsa doll from “Frozen”; and a Minnie Mouse kitchen set. With discounts, the items together cost about half their total list price of $200.

“As a parent you just try to make your children happy. You’re not trying to break the bank,” Ms Weir said. “I spent a little more this year, but with the few sales I received, I can at least say I wasn’t heartbroken about how much I spent.”

Barbie – whose banner year was fueled by the blockbuster movie – sold particularly well in a year when there were no breakout toys. The doll and her many accessories are selling well at Mary Arnold Toys, a family-owned store on Manhattan’s Upper East Side. And overall sales at the store are stable, says Ezra Ishayik, who has run the store for 40 years.

“It looks like it’s about the same as last year – no better, no worse,” Mr Ishayik said. “The economy seems good to me. It’s decent, it’s okay, people buy. We are at the top of the sector, so we don’t see any downward trend at all.”

But the past few months have been more challenging for Modi Toys.

Modi, an online retailer, sells stuffed animals and books based on Hindu culture and typically sees two sales increases in the fourth quarter: one in the run-up to Diwali and one around Christmas.

The company normally generates more than $100,000 in sales in the month before Diwali, which fell on November 12, but this year sales fell into the five figures. That was partly because the retailer launched a product too early and then had to offer deep discounts to boost sales – something retailers try to avoid with new products.

“That’s when we knew we were really going to have a challenging holiday season,” said Avani Modi Sarkar, founder of the company.

As she closes out the year and looks ahead to 2024, Ms. Sarkar is testing new digital marketing strategies, including sending personalized email newsletters to customers and keeping a close eye on discounts.

“We’re just trying to close the gap in front of us and not end the year with as big a gap as we would have,” she said. “I know what we are capable of and I am trying not only to reach that level again, but also to exceed it.”

A clear sign that consumers are being more careful about how much they spend comes from discount stores. In November, Burlington, an off-price retailer, and the parent company of Marshalls and TJ Maxx said they saw comparable store sales increase 6 percent.

Online retailer ThriftBooks said its sales are also up this holiday season, up more than 20 percent in November and more than 24 percent this month compared to a year ago, according to Ken Goldstein, the company’s CEO.

“This was unprecedented,” Mr. Goldstein said. “This is unbelievable when you look at the volume we are working on. Because we are a valuable product, I think a lot of people are putting their money to work.”