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Will This Holiday Season Reflect the Rebounding Economy?

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Shrugging off the global worries sparked by the derailed Chinese economy, the U.S. economy unveiled a solid GDP number for the second quarter of 2015. This underscores its inherent strength to withstand any overseas turmoil. The momentum witnessed now offers enough reason to the Federal Reserve to go for a rate hike before the end of this year, which otherwise seemed a distant matter, given the recent collapse in the global stock market.

Favorable GDP Number Steering the Wheel

The third and final data for GDP is out, and reveals that the U.S. economy is rebounding. According to the Bureau of Economic Analysis, GDP jumped 3.9% in the second quarter, faring better than the second estimate of 3.7% growth and the first estimate of a 2.3% increase. It was also significantly higher than the first quarter's anemic growth rate of 0.6%. Per the report, increasing consumer spending and non-residential investment played major roles in boosting the economy in the second quarter.

Retailers are looking forward to this year's busiest shopping season as the economy is on high gear. Given the reviving U.S. economy, the retail space is brimming with optimism, and retailers will leave no stone unturned to make the most of the holiday season. A gradual recovery in the housing market and manufacturing sector, along with an improving labor market and lower gasoline prices, are favoring the economy. In August, 173,000 jobs were created, while the unemployment rate dropped to 5.1%.

Improving Consumer Spending Instills Confidence

Given the improving job picture, gradual rise in wages and stubbornly low inflation, we expect consumer spending - which accounts for over two-thirds of the U.S. economic activity - to improve. Consumer spending increased 3.6% in the second quarter from the previous estimate of 3.1%. The Commerce Department recently unveiled that consumer spending has advanced 0.4% in August. This follows an equivalent increase in July.

With customers willing to spend more, we think that retailers could hear the cash registers jingle this holiday season. Data compiled by eMarketer suggests a 5.7% jump in holiday sales (November and December) to $885.7 billion against 3.2% growth projected earlier. Retail E-commerce holiday season sales are anticipated to increase 13.9%, and would represent approximately 9% of total sales this season (or $79.4 billion), up from 8.3% last year.

Retailers Should Act Cautiously & Diligently

With the economy gaining traction, retailers will be on their toes to make the most of the holiday splurging. They will sweep buyers off their feet with early-hour store openings, huge discounts, promotional strategies, and free shipping on online purchases. Since the season accounts for a sizeable chunk of yearly revenues and profits, retailers will grab every opportunity to drive footfall.

As they say, "The early bird catches the worm," so retailers such as Macy's, Inc. M , Wal-Mart Stores Inc. WMT , Target Corporation TGT , Sears Holdings Corporation SHLD , J. C. Penney Company, Inc. JCP , Kohl's Corp. KSS and Best Buy Co., Inc. BBY , may open their stores early this time around too. They are expected to come out with lucrative offers to drive traffic and tap this holiday season.

Despite these, we still believe that retailers should be cautious and diligent this time, given the turbulence in the global financial market which may affect consumer sentiment and downplay economic growth. Moreover, the market reaction, in case the Fed decides to go for a rate hike, remains to be seen.

Bottom Line

The holiday season accounts for a sizeable chunk of yearly revenues as well as profits. This is the reason why retailers grab every opportunity to drive store traffic. We believe that all these factors will have a favorable impact on the upcoming holiday season, unless an unforeseen event dampens the mood. Although a panel of economists expects economic growth to slow in the third quarter compared to the second quarter, a pickup is anticipated in the final quarter of 2015.

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WAL-MART STORES (WMT): Free Stock Analysis Report

MACYS INC (M): Free Stock Analysis Report

PENNEY (JC) INC (JCP): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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