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Spokane, Washington  Est. May 19, 1883

Halloween shoppers not spooked as economic slowdown remains elusive

A September 2023 survey from Bankrate showed that 50% of holiday shoppers have already started buying their holiday gifts (or plan to do so by Halloween on Oct. 31).  (Dreamstime)
By Jeanna Smialek and Jordyn Holman New York Times

Economists spent much of 2023 warning that a recession could be imminent as the Federal Reserve raised interest rates to the highest level in more than two decades. But for companies such as Soergel Orchards in western Pennsylvania, a slowdown is nowhere in sight.

“People are buying the decorative things,” said Amy Soergel, manager at the company, who explained that gourds and cornstalks were in high demand and that customers were coming out to select pumpkins and apples. “People love to pick – people will pick anything.”

Sales are up even though rainy weekends have held back attendance at the farm’s annual fall festival. Demand at the hard cider shop has been solid. And the owners are bracing for a strong season in their store selling Christmas decorations.

Soergel’s bustling business is a microcosm of a trend playing out nationwide. Consumer demand has unexpectedly boomed in 2023, defying widespread expectations for a slowdown and helping to fuel strong overall growth. The economy expanded at an eye-popping 4.9% annual rate in the third quarter, far faster than the roughly 2% pace officials at the Fed think of as its standard growth pace.

That is great news for American companies. But it is also a source of confusion. Why is the economy still growing so quickly more than a year and a half into the Fed’s campaign to slow it down, and how long will the upswing last?

Fed officials have lifted interest rates above 5.25%, making it more expensive to take out a mortgage, borrow to expand a business or carry a credit card balance. Those moves were meant to trickle out through markets to cool the real economy. Some parts of the economy have felt the squeeze – existing home sales have slowed, for instance. Yet employers continue to hire, and families keep spending.

It is difficult to predict what comes next as the all-important holiday shopping season approaches. A solid job market and cooling inflation could combine to give consumers the wherewithal to keep powering the economy forward. But many companies are being careful not to build up too much inventory or predict too strong a sales outlook, worried that higher borrowing costs could collide with smaller savings piles and the accumulated effects of more than two years of rapid inflation to make Americans thriftier.

“Sentiment definitely feels down,” Thomas Barkin, president of the Federal Reserve Bank of Richmond, said during an interview Oct. 19. “The folks I talk to are still clamping down in preparation for 2024.”

What happens with holiday shopping could help shape what the Fed does next.

The central bank has been trying to slow growth for a reason: Inflation has been above 2% for 30 months now. To get prices under control, policymakers think they need to tamp down demand.

The logic is fairly simple. If rapid hiring continues and wage gains prove quick, people who are earning more money are likely to feel confident and keep spending. And if shoppers are eager to buy restaurant dinners, new gadgets and updated wardrobes, it will be easier for companies to protect their profits by raising prices.

That is why Fed officials are keeping an eye on how strong consumers and the job market remain as they contemplate what to do next with interest rates. Policymakers are almost sure to leave rates unchanged at their meeting Wednesday, and a number of them have suggested that they may be done raising borrowing costs altogether.

But top officials have kept alive the possibility of one final quarter-point increase, if economic data were to remain buoyant.

“We are attentive to recent data showing the resilience of economic growth and demand for labor,” Fed Chair Jerome Powell said in a recent speech, adding that continued surprises “could put further progress on inflation at risk and could warrant further tightening of monetary policy.”

So far, companies offer a mixed picture on the outlook. Many are suggesting that seasonal shopping is off to a strong start. Halloween spending is expected to climb to a record $12.2 billion, up 15% from last year’s record of $10.6 billion, according to the National Retail Federation’s annual survey. The group is expected to release its holiday forecast this week.

Walmart reported strong sales during its back-to-school season, which its CEO noted was a good indicator for how spending would look during Halloween and Christmas.

“Typically when back-to-school is strong, it bodes well for what happens with Halloween and Christmas,” Walmart CEO Doug McMillon said on an earnings call in August.

But some companies are uncertain. Tractor Supply Co. CEO Hal Lawton said during an earnings call last week that the retailer was stocking up on fall and winter décor – selling, for instance, a skeleton cow that was a “TikTok viral sensation.”

But “we acknowledge there is a broader range of estimates for holiday consumer spending than we’ve seen over the last couple of years,” he added.

And some analysts think winter shopping could prove weak. Craig Johnson, founder of retail consultancy Customer Growth Partners, expects holiday sales to grow at 2.1%, the slowest since 2012, he said in a report released Oct. 17.

“The fact that people had a good Halloween doesn’t necessarily mean that they’re going to have a good holiday,” Johnson said. “It’s a different buying mentality, and there’s not a carryover – you’re not going to see apparel lines from Halloween extend over into Christmas.”

Retailers report that they are carefully watching how much inventory they have headed into the holidays, and a Fed survey of business experiences from around the Fed’s 12 districts referenced the word “slow,” “slower” or “slowing” 69 times.

Part of the challenge in forecasting is that consumers seem to be splitting into two groups: Wealthier consumers keep spending even as the bottom tier of shoppers either pulls back or looks for deals.

Department store chain Kohl’s says it is seeing this type of bifurcation play out in its customer base and is adjusting in stores accordingly.

Shoppers at the Kohl’s in Ramsey, New Jersey, were greeted with a range of discounted Christmas items including miniature snowmen and ornaments at the front of the store. That design was done on purpose – Kohl’s executives want the section to appeal to deal-hungry shoppers.

But in a sign that higher earners could fuel growth, it has also started to stock new category items such as decanters, wineglasses and electric corkscrews.

“We want to make sure we’ve got the right broad breadth of assortment for the breadth of customer base that we’ve got,” said Nick Jones, Kohl’s chief merchandising and digital officer. “And that’s an element of making sure everything’s got to be great value. But great value doesn’t always mean low price.”

This article originally appeared in The New York Times.