Here's what will drive an increase in holiday spending: Economist

As the year embarks on October, the holiday shopping season is fast approaching. Mastercard Economics Institute Chief Economist Michelle Meyer joins Wealth! to share her insights on expected consumer spending trends for the upcoming period.

Meyer says Mastercard, using its SpendingPulse data, expects a 3.2% year-over-year growth in overall retail spending during the holiday season, which she defines as November 1st to December 24th. However, she notes that for many consumers, this season often begins earlier.

A standout in Meyer's forecast is the electronics sector. She predicts a 6.5% increase in spending on electronics during the holiday period, attributing this growth to the current replacement cycle and deflation in prices for these items. As consumers continue to seek value, Meyer anticipates that companies will lean heavily into promotions this holiday season. This strategy is expected to result in "demand-led declines in prices."

"In our view, we're setting up for what should be a pretty reasonable season here for the consumer," Meyer states.

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This post was written by Angel Smith

Video Transcript

Well, changing leaves and the smell of pumpkin spice in the air can only mean one thing holiday shopping season right around the corner.

So what shopping trends are we expecting to see this fall and winter here with a preview.

We've got Michelle Meyer who is the Mastercard Economics Institute, Chief economist Michelle.

Always a pleasure to grab some time with you and gather some insights here.

So what is the anticipation?

What categories are gonna see some strength this year?

So when we look at overall spending as we're measuring as retail sales X autos using our spending P data, we're expecting 3.2% year year growth during the holiday period which for this estimate, we're defining as November 1st to December 24th.

But as you all just mentioned, it starts earlier, it's starting in a week if not already underway.

Um So of course, you want to look at trends and momentum in October as well, which we will be tracking very closely in terms of the categories Brad.

I mean to us, we think we're gonna see potentially some improvement or pick up or acceleration maybe in spending on gadgets on electronics.

We're looking for, um, just over 6.5% growth on a year to year basis in electronic spending and that's a function of a few factors.

One, the replacement cycle probably is kicking in, especially for some of those things you purchased right after the pandemic.

Um, prices have declined.

There's a lot of deletion in those categories and now interest rates declining all of that should lend itself to some support for some of those goods categories that have not been in favor of late.

We've also heard that this is going to be a, a very promotional holiday season as well for, for companies.

Uh What does that mean?

And they're gonna have to do in order to make sure that they are really catching the mind share and the wallet share per share of the consumer very much so.

And that is consistent with what we're seeing in the overall macro data around inflation.

So in our research note that we published along with the holiday forecasts, we created a proxy of the categories in the CP I basket that tend to fall into holiday spending.

And a lot of those categories are deflation.

Prices are declining on a year to year basis.

And that is very much consistent with a the fact that consumers are looking for those deals, looking for those promotions demand led declines in prices.

Um But also the market, the market is calling for that.

There's a lot of competition there's a lot of new innovation, a lot new items out of there that can help um attract customers and spending.

So promotions matter in order to make sure you get that market share, we we got the insight from conference board, really kind of describing the state of the consumer this week and, and some of the confidence um among the consumer as well.

I I wonder in the terms of the health of the consumer, what what your diagnosis is over at Mastercard.

So we're looking at the drivers of consumer spending and when you do, you look at labor market, you look at household balance sheets.

Um and in our view, we're setting up for what should be, you know, a pretty reasonable season here for the consumer.

The labor market is still solid in my view, right?

It has cooled, of course, from the last few months when you look at average job creation, it's well in excess of what would be considered an underlying growth rate.

When you look at wage growth, it's running above the underlying rate of inflation for goods and services at core P CE or poor CP I deflator.

So yes, the economy is shifting.

Yes, there's some more vulnerabilities but it's still an economy that is supporting the consumer and by the way has been for some time, one of the data points out this morning, um the GDP revisions I thought they were really meaningful.

They showed upward revisions in GDP growth, upward revisions in consumer spending and upward revisions in the savings rate.

So the savings rate is higher than we had previously thought before the revisions.

Michelle just lastly while we have you here.

Um I'm taking a look at a data point that came out from Adobe this week.

Forecasting a record $240.8 billion in the US holiday season.

Online spending.

Black Friday is expected to grow and outpaced Cyber Monday as well.

Uh or the growth there should outpace Cyber Monday is what they're saying.

When you think about that figure alone and the digital spending that we're anticipating.

I mean, what are some of the core drivers?

Is, is it just me succumbing to all of the different ads that are showing up in, in my stories or via influencers that are out there and just saying, oh, that looks nice.

I guess I'll just hit by now.

Well, I think that it is a bit of that.

We've made it really easy to shop online.

You no longer have to sit down at your computer and make an organized attempt to purchase.

You can buy, easily clicking on the way as you're walking from one activity to the other, which I tend to do a lot as a, as a working mom, you gotta be fast and efficient.

Um So I, I do think that things have been made easier.

Consumers have power in terms of where when and how they spend.

Um, and we similarly look for strong e-commerce spending.

So we're looking for just over 7% growth on a year to year basis.

Um, when we're looking at e-commerce Retail X Auto.

So we're, we're in line with that view and that's been the trend that we've seen for the last several years.

Is this, um, shift towards ecommerce?

You know, I, I, I'd be remiss not to bring up the other side of this as well here, Michelle, uh the New York fed, of course, continuing to track some of the record levels of credit card debt.

How do we make it out of consumers, make it out of this holiday season and not be in much more dire straits come the beginning of 2025.

It's important to track, it's important to look at all aspects of the balance sheet debt levels, wealth levels, um and debt service ratios as well.

So I think you have to look at the complete picture, debt levels are higher, but so wealth levels and you look at debt service ratios, they, they haven't increased all that much.

They're trending close to where they were prior to the pandemic.

Um And with interest rates coming down and the fed committed to a cycle of lower interest rates, all of that should, should help.

Um But as economists, we're looking at the aggregate picture, we're looking at the full picture which suggests we should see continued momentum for spending.

But of course, it's gonna differ for each individual household out there.

Michelle Meyer, Mastercard Economics Institute's Chief economist Michelle.

Thank you once again for joining us here on the program.

Great to catch up.

Absolutely my pleasure.