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Ask an Economist: Holiday Sales Projections for Retail

Posted on 8.14.2016

By Danielle Marceau, Sr. Economist at Prevedere

It’s been a tough year for the retail industry, as a whole. Sales numbers haven’t been as encouraging as companies had hoped going into 2016, and in recent months, consumer spending has grown at a snail’s pace across the industry (for both brick-and-mortar retailers and their online counterparts). When looking at year-over-year (YOY) comparisons in consumer spending, momentum has been decelerating. Retail and food service sales has generally grown through the first half of the 2016 on a YOY basis, but the rate of rise has been miniscule coming in at 1.7 percent in June.

The lackluster growth in Retail Sales, coupled with the U.S. economy’s currently soft state, makes it easy to assume the upcoming holidays will not be as bright for online retailers. But, think again. Despite various opinions and failed predictions at the beginning of the year, the current slow-down was expected among those who were closely watching leading economic trends, and positive signs are emerging from these same leading indicators. Retail sales, which are driven by factors such as consumer attitudes, credit affordability, construction activity and other demand factors have been pointing to a slowness in growth since the middle of last year. But by taking a look at the current state of these same factors, we’re starting to see a reversal in these downward trends. Using these insights, online retailers can make more accurate predictions – and better planning decisions – on what the next six months will look like. So what should online retailers expect this holiday season? Let’s take a look.  

Retail Industry Indicators to Watch

Despite the abundance of data available, most companies are still building forecasts and making critical decisions based on their own internal, historical data. With this method, they leave out consideration for economic events that greatly impact business performance – no matter how good of a sale or promotion they offer. Leading economic indicators of retail and e-commerce sales can signal future growth, contraction and major shifts in momentum by analyzing various external factors, some more obvious than others. Consumer sentiment and hourly wages clearly illustrate purchase likelihood – but factors like construction and even raw commodity prices also have proven themselves as indicators of the health of the overall retail industry. 

On a YOY basis, the following factors are key in pinpointing upcoming trends in retail industry sales. By paying attention to the factors below, online retailers will have a much more accurate idea of what to expect in coming months and can plan their inventories, logistics and marketing resource allocation accordingly.

The Architectural Billings Index is a five-month leading indicator of real retail sales.

Consumer Sentiment is a six- to nine-month leading indicators of retail sales. 

The ISM Non-Manufacturing New Orders Index is a six- to nine-month leading indicator of retail sales.

On the contrary, job growth or slowness is not a leading performance indicator, yet often incites fear of what’s to come for online retail sales numbers. Unlike the factors referenced above, employment is a lagging indicator. The jobs report depicts numbers that are in reaction to strength or softness we have been seeing in the economy in previous months. It is not a telltale sign of future activity. 

Expectations for Holiday Cheer

In examining the leading indicators of retail sales, all signs point to acceleration in the rate of growth around the fourth quarter of the year, just in time for the holiday shopping season. Architectural billings indicate that construction is on the rise, which results in people and businesses thriving. When these numbers are up, its an illustration that the economy is moving in the right direction. Consumer sentiment data, which is gathered from social media and online fodder, for example, tells us the likelihood and willingness of consumers to buy, buy, buy is accelerating. The ISM non-manufacturing index – a composite of the health of industries like arts and entertainment, educational services, real estate and more – grew for the 78th consecutive month in July

Of course, there are always factors that can throw this momentum off track. For example, if the dollar weakens, interest rates increase or major stock market corrections occur, consumers’ propensity to spend may weaken out of fear. However, online retailers should not focus on these uncommon and unlikely events in making their holiday projections. In examining the indicators I’ve mentioned, it is expected that the U.S. economy will remain in general growth territory through the remainder of this year. The retail industry as whole will be a primary beneficiary of this growth trend, with acceleration picking up just in time for the holiday shopping season. My advice to online retailers: get your holiday inventory, promotions and shipping affairs in order to capitalize on a thriving shopping season this November and December.

About the Author

Danielle Marceau is a senior economist for Prevedere, a predictive analytics company specializing in Business Performance Forecasting. Her work through Prevedere has helped many Fortune 500 companies make better sense of economic trends and supports the company’s  Industry Outlook Reports. She is a regular contributor to Forbes and has been featured on NPR, MarketWatch and more. Follow her on Twitter @D_Marceau1 and search hashtag #PVOutlook for more retail industry updates and trends.

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