American consumers spent a lot over the holidays and should keep it up this year according to economists who point out that will embolden companies to expand and hire.
Americans spent more in the 50 days before Christmas than retail analysts expected. Spending grew at the fastest rate since 2006 – the surest sign yet they’re becoming less frugal as the economy rebounds.
“It has been the consumer that has been afraid to spend that has held the economy back and held businesses back from hiring,” says Joel Naroff of Naroff Economic Advisors. “That cycle is beginning to break.”
Normally in January, shoppers pull back. But they’re not likely to this year. Economists say the tax cuts approved by Congress, a rising stock market, a slow but steady rise in hiring and growing willingness by banks to lend will sustain spending by consumers.
“I don’t think consumers are going to suffer a hangover after Christmas,” says Mark Zandi, chief economist at Moody’s Analytics. “They are going to hang tough and spend more aggressively in 2011.”
Mr Zandi thinks consumer spending will rise 3.6 per cent in 2011, twice as fast as in 2010. That would propel the economy to grow about four per cent, up from the 2.8 per cent Zandi expects for 2010. The government’s report on fourth-quarter growth for 2010 comes out later this month.
Other economists expect economic growth closer to 3.5 per cent this year.
The stronger growth should lead companies to add 2.9 million jobs this year, up from 1.1 million projected for last year, Mr Zandi says. That would drop the unemployment rate to nine per cent in 2011, down from an average of 9.5 per cent expected for all of 2010.
Excluding auto sales, holiday shopping in the 50 days before Christmas totaled $584 billion, according to MasterCard SpendingPulse. That was 5.5 per cent more than in 2009 – the biggest increase since 2006.
From October 31 to January 1, revenue at stores open at least a year rose 3.8 per cent over last year, according to an index compiled by the International Council of Shopping Centers. That’s the biggest increase since 2006, when the measurement rose 4.4 per cent.
Despite a depressed housing market, rising energy prices and unemployment at 9.8 per cent, economists say they think the spending momentum will carry well into 2011.
Consumers boosted spending a solid 0.4 per cent in December 2009 but just 0.1 per cent in January 2010. This year, Zandi expects 0.4 per cent both months.
Working Americans will start seeing extra money in their first pay check this year because the tax law cut Social Security taxes.
The Standard & Poor’s 500 stock index rose about 20 per cent the last four months of the year. The higher stock prices have boosted wealth, making people more inclined to spend.
“We think it is going to be a very strong January for retailers,” says Gary Stibel, CEO of the New England Consulting Group, whose clients have included McDonald’s and Wal-Mart.
Besides higher gasoline and food prices, the economy faces other threats that could derail forecasts should they worsen:
• Further declines in home prices and more foreclosures.
• Higher interest rates, which could further depress home sales, reduce expensive purchases like cars and make it costlier for businesses to expand and hire.
• Layoffs and spending cutbacks by struggling state and local governments.
The Labour Department reported that fewer people applied for unemployment benefits over the past month than in any other four-week period since July 2008 – a sign that layoffs are slowing.
And a December survey by the Business Roundtable found that 45 per cent of CEOs of large companies planned to add jobs within six months, up from 31 per cent who said so in the fall.
One reason spending will be strong is that consumers will save less. Mr Zandi thinks they’ll save 5.3 per cent of disposable income, down from 5.8 per cent last year. Some economists predict as little as four per cent.