Never Mind Black Monday: You Need to Watch Black Friday

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By George Leong for Investment Contrarians |

The key holiday shopping season is closing in fast. With the critical “Black Friday,” November 23, a month away, the retail sector will be anxious to see if consumers deliver.

The recent jobs report added some optimism to the retail sector; albeit, I doubt it will be enough to drive consumers to the malls and online to spend. We need to see progressive jobs creation, rather than the single reading, and we want to see a positive pattern. If jobs continue to rise, this would likely translate into higher sales in the retail sector.

Thanksgiving weekend, beginning with Black Friday, is important, as you can see in the chart below. Retail sales have increased in three straight years and the hope is for 2012 to be a banner year. The National Retail Federation is optimistic and estimates this holiday shopping season will generate sales of $586 billion, up from $563 billion in 2011. (Source: “Holiday FAQ,” National Retail Federation,  accessed October 19, 2012.)

Copyright Lombardi Publishing 2012; data
source: National Retail Federation

The monthly retail sales numbers in the retail sector are showing some encouraging signs. The Thomson Reuters Same Store Sales Index (comprising of 17 U.S. chains) contracted 3.6% in September, which was in line with the estimate but well down from the 6.4% increase in September 2011. (Source: “U.S. retailers,” September sales up before holiday rush,” Reuters, October 4, 2012.) There’s a lot of work ahead for the retail sector

Consumer confidence in September was encouraging, with a reading of 70.3, above the estimate of 63.0, according to Briefing.com, and the upwardly revised 61.3 in August. Yet the general feeling is that a reading of 90.0 indicates a healthy economy, and this has not materialized since December 2007, when the recession began. It looks like it will be some time until the confidence reading heads back toward the pre-recession readings of 90.0.

The reality is that when consumers are cautious, they tend to hold back on any major purchases in the retail sector, such as homes, vehicles, furniture, appliances, and travel. This will impact spending and GDP growth, and the ability of companies to expand their businesses.

The durable goods orders reading for August was especially weak after declining 13.2%, well below the estimated decline of five percent and the growth of 4.1% in July. This means consumers are not spending on goods and services that are not deemed essential to daily living.

For the retail sector, these are not readings you can get excited about.

A big plus is the strengthening housing sector that is showing improvement in building and starts, along with a slight rise in home prices. We need to see home prices continue to rise.

Hence, until we see consistent and strong jobs growth and steady, higher home prices, consumers will likely continue to be hesitant to spend, and the retail sector will suffer.

Tags: consumer confidence, GDP growth, jobs growth, Recession, retail sales, retail sector