Global Research Analyst
Global Research Analyst

Analysis and outlook for the global economy

  • U.S. consumers appear in good spirits as we enter the holiday season.
  • We anticipate that holiday sales should rise modestly compared to last year's level.

What it may mean for investors

  • We expect the U.S. economy to continue showing slow-but-steady growth and are forecasting 2.1 percent growth for 2017. Inflation should remain in check, as employment continues to improve.

Download the report (PDF)

'Tis the Season

With the presidential election behind us, U.S. consumers appear in good spirits entering the holiday shopping season. Although foot traffic declined slightly from last year's level, online sales on Thanksgiving Day and Black Friday increased by approximately 18 percent to around $5.27 billion, and retail revenue from mobile-device transactions rose to $1.2 billion on Black Friday, a 33 percent hike over last year's level. Further, The Conference Board's Consumer Confidence Index jumped 6.3 points to 107.1 in November, reverting to pre-crisis levels. University of Michigan consumer sentiment also climbed 4.2 points in December over last month in the initial release. Although post-election confidence levels typically improve, the latest report indicated optimism about current and future economic conditions.

Chart 1. Current Conditions and Consumer Expectations Measures Jumped after the U.S. Election

Graph illustrating current economic conditions and consumer expectations post-election. Contact your Relationship Manager for more information.

Source: Bloomberg, Wells Fargo Investment Institute, 12/14/16. Circled data highlights the recent jump in sentiment.

Consumer Enthusiasm with a Sprinkle of Holiday Cheer

The National Retail Federation (NRF) estimated that 154 million consumers shopped over Thanksgiving weekend this year, three million more shoppers than last year. Average spending per person over the period totaled $289.19, about a $10 dip from last year.2 Although spending per person may fall slightly below last year's level, overall sales volumes are expected to increase this year. We expect total holiday sales to rise by 3.8 percent this year over 2015, compared to a 2.9 percent increase last year over 2014.3 This expectation is slightly more bullish than the NRF's forecast of 3.6 percent. More broadly, retail sales increased 0.1 percent in November over the previous month, adding to year-end momentum.

The U.S. economic backdrop appears to support a robust holiday sales season this year, giving consumers plenty of cheer. The domestic unemployment rate ticked down to 4.6 percent last month, the lowest level of the recovery. Nationally, home prices are rising—the Case-Shiller U.S. National Home Price Index has risen 5.5 percent over the past year—and the U.S. equity market continues to break new highs, enhancing the wealth effect for consumers and investors alike. In a recent Gallup poll conducted during the last week of November, Americans expressed more optimism about the U.S. economy than they have during the nine years that Gallup has been tracking the U.S. Economic Confidence Index.4 This result likely stemmed from a combination of factors, including an improving economy and the end of a drawn-out, contentious presidential election.

Consumers are once again open to using credit to purchase goods. Last quarter, auto loans grew by 2.9 percent, credit card balances rose by 2.5 percent, and student loans increased by 1.6 percent. Yet, along with the rise in credit usage, we have seen a 3.3 percent increase in total household 90+ day delinquency rates—delinquency rates at 90+ days are known as seriously delinquent. While this is not a positive development, it should not cause immediate concern for market observers. Credit can help promote economic activity when used in moderation— though too much credit can pose a threat to the economy. In our view, U.S. consumers are currently at a healthy level of credit usage, and we anticipate that consumer spending will continue to be supported by the ongoing growth in wages and jobs.

Economic Implications

We expect that the U.S. economy will continue along its slow-and-steady growth trajectory for at least another year. Much of the growth will be driven by U.S. consumer spending, which comprises about 70 percent of the U.S. economy, on average. We are forecasting real consumer spending to expand by 2.3 percent this quarter on an annualized basis, mirroring last year's growth (with inflation factored in). Inflation has increased slightly over the past year, leading to a flattening of disposable income. Yet, solid job growth and wage increases have helped to offset its effects.

Later this week, the final version of December's University of Michigan consumer sentiment report will be released. Sentiment has been floating around its 2015 12-year high since the announcement of President-elect Trump's victory. We expect that this week's reading will remain near these recent highs as large holiday discounts create optimal buying conditions for consumers. We are keeping a close eye on future sentiment as concern over rising interest rates could add some uncertainty around buying homes and vehicles in the future.

Even though domestic economic growth picked up during the third quarter, we are still forecasting the U.S. economy to grow by 1.9 percent this year. Looking into next year, we are forecasting a 2.1-percent economic growth rate. U.S. employment conditions should continue to improve. As we proceed through the holiday season and into the New Year, we believe that any periods of volatility should be viewed as an opportunity to bring asset classes in line with target allocations.

1 Bloomberg, 11/26/16. Data is from Adobe Systems Incorporated.
2 National Retail Federation 11/27/16
3 Wells Fargo Securities, 11/21/16
4, 11/29/16