Retailers have a recent threat this holiday season: wanderlust.
Americans are returning to the skies, filling hotels, swarming theme parks — and they’re showing a willingness to spend more of their money on trips.
That’s establishing the fiercest holiday season battle for consumers’ wallets since before the Covid pandemic, with persistent inflation already straining household budgets during retailers’ make-or-break quarter. Retailers are juggling other challenges: selling off excess inventory, attempting to lure consumers who already bought plenty of stuff throughout the pandemic and wooing shoppers who’ve develop into more budget-conscious.
For the travel industry, it has been a yr of recovery. Delta Air Lines, Mastercard and Airbnb are amongst the businesses having fun with windfalls. Other corporations have also indicated a shift toward experiences and services. Live Nation reported double-digit attendance growth at theaters, arenas, stadiums and festivals. Starbucks said customers are springing for pricy drinks like pumpkin spice lattes.
“The trend towards spending on experiences continues,” Mastercard CEO Michael Miebach said on a quarterly earnings call late last month. “We saw notable strength in airline, lodging and restaurant spend with a shift away from categories like home furnishings and appliances.”
The pullback in spending on goods already has some retailers warning of tougher times ahead. Amazon shocked investors in late October with a weaker-than-expected forecast for the top of the yr as e-commerce growth slows, and the corporate announced a company hiring freeze. Appliance giant Whirlpool cut its estimates.
Shipping giant FedEx missed expectations in its September report. CEO Raj Subramaniam said he anticipates a “worldwide recession.” U.S. retail sales were flat in September, an indication of inflation taking its toll on consumers, because the figures aren’t inflation-adjusted.
Walmart, Goal, Home Depot, Macy’s and others will deliver their very own updates to investors in mid-November. Walmart and Goal over the summer dissatisfied investors after they detailed the financial toll of excess inventory.
Everlasting vacations
Travel spending has soared, due partially to flexible office policies which can be allowing Americans to travel more and book jaunts to Europe well into the traditional offseason.
As of September, airline ticket sales were up greater than 56% from a yr ago, and rose 10.9% versus the identical month in 2019, in response to Mastercard Spending Pulse, which measures in-store and online retail sales. Lodging sales shot up greater than 38% from a yr ago, and were up 42% versus September 2019.
“Taking the annual vacation, I feel, is an entitlement for people,” Hawaiian Airlines CEO Peter Ingram said in an interview last month. “After having been deprived of that for a few years when there have been restrictions on the power to maneuver around, individuals are really embracing it and going out.”
United Airlines CEO Scott Kirby noted that more relaxed office attendance policies are also letting people travel more.
“That is why September, a normally off-peak month was the third strongest month in our history,” he said on the carrier’s earnings call.
The appetite for travel is persisting despite soaring airfares, which have been fueled by a pilot shortage and aircraft delivery delays. Executives last month also said many individuals are even willing to pay up for more spacious seats. Airfare was up 43% on the yr in the most recent U.S. inflation read.
“Travel stays extremely resilient,” said Anna Zhou, an economist at Bank of America Institute. Even after Labor Day, when travel normally slows down, “it’s just not the case this yr, especially for international travel,” she said.
For now, airlines are brushing off worries about the opportunity of a recession.
“While there’s noise regarding whether we’re headed right into a recession or not or whether we may even be in a single now, we have now not seen any noticeable impact on our booking and revenue trends,” Southwest’s CEO Bob Jordan said on an Oct. 27 earnings call.
‘Last hurrah’
Airlines and hotels aren’t seeing a slowdown in travel yet. But when a recession hits, that would jeopardize all consumer spending — and prompt even higher-income Americans to rethink big trips.
“Where we go a yr from now, that is difficult to predict,” Hawaiian Airlines’ Ingram said.
Tim Quinlan, senior economist at Wells Fargo, expects the vacation season shall be the “last hurrah” for consumers. He anticipates a 2% annual gain in holiday retail sales yr over yr in November and December when adjusted for inflation. That compares with an estimated 8.1% last yr, and a ten.4% annual gain in 2020.
The bank originally projected a recession around Labor Day. Yet unemployment has remained historically low. The U.S. added 261,000 jobs in October, ahead of estimates.
Americans have kept up their spending by cutting back on their savings rate, racking up bank card debt and drawing down savings accounts, Quinlan said. Soon, he said, they are going to have to begin pulling back and making trade-offs.
“Individuals are spending greater than they’re making and that is type of the definition of unsustainable,” he said. “The patron is on borrowed time.”
Quinlan now predicts a recession will hit in April, May or June.
The patron is on borrowed time.
Tim Quinlan
Wells Fargo senior economist
U.S. bank card balances rose $46 billion throughout the second quarter, a 13% jump that was the very best in 20 years, in response to the St. Louis Fed. Each housing and nonhousing debt are up sharply because the start of the pandemic.
Bank card delinquency rates at the top of the second quarter hit 1.81%, the very best because the first quarter of 2021, in response to the St. Louis Fed. But that is far below the historical average, and consumers are still sitting on healthy savings built up within the pandemic.
The National Retail Federation, a serious trade group, on Thursday joined other industry watchers in forecasting more modest holiday sales – and saying a few of that spending shall be funded through bank card debt and savings accounts slightly than income.
Jack Kleinhenz, the group’s chief economist, acknowledged on a call Thursday that travel is a spending priority for more consumers, too. Yet he said he sees it as a complement, not a trade-off.
“You would possibly say, ‘Well, geez, that ought to take away retail sales because people shall be spending more on gasoline and for travel, airline tickets,’ but at the identical time, individuals are bringing food and presents and we expect them to be spending more on outfits.”
Travel is probably not seeing a drop, since people often plan and pay for trips months upfront, said Jorge Barraza, an assistant professor of consumer psychology on the University of Southern California.
“It could be just the style of thing that individuals don’t perceive how much prices have gone up they usually’re willing to place up with it because there’s pent-up demand to travel,” he said.
And, he added, seeing friends or family post about their trips on social media can motivate people to book vacations, even when it means dipping into savings.
“When you’ve times of stress and uncertainty, we’re more more likely to see that YOLO behavior happening,” he said, referring to the expression “You simply live once.”