Are the Holidays' Retail Spending Gains Sustainable?

Preliminary reports of consumer activity in the weeks leading up to the Christmas long weekend suggest a marked improvement in retail sales as compared to last year’s relatively lackluster gains. According to the latest report from MasterCard SpendingPulse, November and December retail sales through December 24 were 5.5% higher than a year earlier. Retail sales were up 4.1% last year, but that result followed belt-tightening and a drop in activity in 2008. As part of a long-term structural shift, online retailers registered the largest gains this year; but bricks and mortar retailers measured significant gains, as well.

The final retail tally for December will be tempered by the blizzard that has swept through the Northeast, keeping shoppers at home during the important sales period immediately following Christmas Day. Controlling for the negative impact of the inclement weather, however, retailers can cheer that results were on the upside of expectations. Looking forward, it is unclear if these gains will be sustained or if Americans will return to their more recent modus of frugality. On one hand, the extension of the Bush-era tax cuts and the payroll tax holiday will collectively allow for greater potential discretionary spending in the New Year. At the same time, consumer sentiment remains well below the levels needed to translate a large share of after-tax income gains into actual spending.