James Ragan, CFA, Director of Wealth Management Research
While optimism remains high for a strong 2021 holiday shopping season, Santa’s elves are worried about persistent production and transportation bottlenecks that could limit the availability of gifts under the tree this year. But elves are resourceful, and we suspect they will find ways to bring holiday cheer to this year’s unusual holiday season.
Although consumer activity slowed (lower-than-expected retail sales, and a drop in airline passengers and hotel occupancy) in July and August due to the spread of the COVID-19 Delta variant, data modestly improved in September, and optimism remains high that consumer spending will pick up in the fourth quarter. Jobs and wages should continue to increase and consumer balance sheets appear healthy.
As early as February and March of this year, many corporations discussed supply chain disruptions that had not only curtailed manufacturing and production, but also impacted finished goods with transportation and logistics delays. In the spring of 2021, global economies were reopening as vaccine penetration accelerated. Business leaders attributed delays to expected friction following forced shutdowns in 2020 and predicted that bottlenecks would ease by the third quarter. But with Q4 now underway, supply chain challenges have intensified as companies scramble to meet demand. The spread of the Delta variant has shut down factories, caused labor shortages at ports of entry and trucking companies (leading to massive wait times), and created additional delays due to a shortage of containers and container ships. We increasingly see limited supplies of many common household products at major retailers, and manufacturers have cautioned that product availability could be limited for toys, appliances, electronics, apparel, footwear and tools, as well as many other popular gift items.
Supply chain-caused product shortages could become even larger due to strong demand, as U.S. consumers appear ready to increase spending in 2021, particularly given that 2020 holiday spending exceeded expectations, according to the National Retail Federation (NRF). Strong consumer demand, as expected, would exert even more pressure on supply chains. This means holiday shopping has likely already started as savvy (or obsessed) consumers acquire popular gift items earlier than usual. Some companies that sell high-value, small-size goods (think smartphones) will use air freight to keep shelves stocked, so consumers who miss early supplies could be rewarded for waiting. But many impatient consumers will avoid the risk of “out-of-stocks” and look for different ways to fill holiday stockings. This bodes well for products that are manufactured in the U.S. (while not common, many recognizable consumer products brands are still “made in the USA”) and even more so for holiday gift cards, which have been a high-growth holiday spending category for several years. But perhaps less appreciated is the potential for gift givers to splurge on high-value experiences and services, such as wine clubs, travel vouchers, sky diving excursions, cooking classes, or other master class online training.
According to the U.S. Department of Commerce, consumer spending comprised 69% of the U.S. gross domestic product (GDP) on an annualized basis as of 6/30/21. About one-third of that spending goes to goods, and two-thirds are for services. While much of the spending on services is allocated to household and health care expenditures, the 2021 holiday season could see a big uptick in that category for gift items. So keep in mind that if you receive a gift envelope from the North Pole containing a membership to a wine of the month delivery from Napa Valley, the elves are not making a statement regarding your wine-drinking habit, but rather are finding ways to beat supply chain bottlenecks.
Copyright D.A. Davidson & Co., 2021. All rights reserved. Member SIPC.
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Gross Domestic Product (GDP) is reported by the U.S. Department of Commerce Bureau of Economic Analysis (BEA), which defines GDP as the value of goods and services produced by the nation’s economy less the value of goods and services used up in production. GDP is also equal to the sum of personal consumption expenditures, gross private domestic investment, net exports of goods and services, and government consumption expenditures and gross investment. Our discussion in this notes comes from the BEA’s Second Quarter GDP report dated 9/30/21. The National Retail Federation is a trade organization based in New York City that includes membership from many of the nation’s leading retailers. Information can be found at nrf.com.