Holiday Spending

Shoppers are out in force, but are businesses and governments catching the holiday spending spirit, too?

With Thanksgiving behind us and the Christmas holidays two weeks away, shopping is now on everyone’s mind.

Shopping has been on economists’ minds all year, as well. That’s how important consumption has been for keeping economic growth in the black.

With online spending records being smashed, the economists will be pleased with how the holiday season is going so far. Nonetheless, for the current expansion to continue, and for further upside in equities, we think we need to see the growth baton passing from consumer spending to business investment, and from central bank policy to fiscal policy.

And away from the malls and the high streets, the last couple of weeks have given us welcome signs that the corporate and government purse strings may be loosening.

Holiday Cheer Is Spreading

According to Adobe Analytics, U.S. consumers spent $7.4 billion online on Black Friday. That was the second-largest online shopping day ever, until U.S. shoppers splashed another $9.4 billion on “Cyber Monday.” That is an increase of some 20% over last year’s spending.

With U.S. vehicle sales and euro zone retail spending exceeding expectations, and another strong U.S. jobs report on Friday showing wage growth holding up at 3% per year, there are few signs of consumer fatigue. Consumer spending is likely to grow by another 2% in 2020—but it may not match this year’s 3% growth, and that will mean less consumer support for corporate earnings.

We therefore welcome signs that holiday cheer is spreading from our shopping malls to our businesses and governments.

Evidence of Recovery

Last week began with better-than-expected data from China’s manufacturers, followed by an upward revision to the last U.S. manufacturing Purchasing Managers’ Index (PMI) and strong increases in the euro zone’s prints.

It was the first time in more than two years that Europe posted two consecutive months of improving manufacturing PMIs, and a good sign of stabilization in what has been a very poor run of survey data. German factory orders delivered another upside surprise later in the week—further evidence of recovery in what has been a worrying area of weakness.

Should this business confidence firm up, we could see some much-needed corporate investment in 2020.

Is government austerity going the same way?

The European Central Bank’s new president, Christine Lagarde, delivered her first testimony to the European Parliament last Monday. Pointed references to the “side effects” of negative rates and quantitative easing suggest that she could push even harder than her predecessor in urging fiscal intervention.

That message may now get a more sympathetic hearing in Germany, where the Social Democratic party, currently governing in coalition with the Christian Democrats, unexpectedly elected two left-wingers to its leadership. They have already indicated that they could withdraw support for Germany’s commitment to a balanced budget.

Last week also saw a new, 13.2 trillion yen ($120 billion) fiscal package in Japan.

Scrooge-like Risks

Anticipation of more government spending may be behind the ongoing rise in long-dated government bond yields, in Europe and beyond. But a simultaneous decline in short-dated yields reminds us that Scrooge-like risks still haunt the holiday season.

Last week, it was global trade yet again. Just as hopes for a U.S.-China accord were rising, the U.S. reinstated tariffs on South American steel and aluminum. It also threatened retaliatory tariffs in response to state subsidies for Airbus and France’s unilateral digital services tax, and suggested that trade policy could be used to get NATO members to meet their defense spending obligations.

We have been writing a lot lately about how politics is likely to be a defining risk in 2020. An impeachment trial in Washington appears increasingly likely. On Thursday, Britons head to the polls for a general election that will determine the next step in the Brexit process. And it is worth noting that politicians who favor looser fiscal policy are not always market-friendly.

But as we enter the holiday season, it is encouraging to see signs that business and government are getting ready to spend and invest. As bond markets suggest, that may be the spur to longer-term growth that enables investors to look through some of the current, shorter-term risks.