Are Investors in a Spending Mood?

by Dennis Jacobe, PhD
Chief Economist, The Gallup Organization

Many retailers have reported that holiday sales started off at a relatively sluggish pace, which is not surprising given the lukewarm results of Gallup's recent holiday spending survey. In fact, Wal-Mart launched a new advertising blitz Friday and will be marking down many popular gift items. A number of other retailers are stepping up their own holiday sales promotions.

These early holiday sales trends are right in line with my view that higher gas prices, relatively weak income growth, and modest job creation have reduced the disposable incomes of many consumers. These consumers are just as likely this year as they have been during holiday seasons in recent years since the recession of 2001 to limit their spending and be highly price-sensitive.

This tepid holiday sales outlook is not good news for many retailers, particularly those serving lower- and middle-income consumers. But does the bad news also apply when it comes to higher-income consumers and the upscale retailers they shop? The most recent UBS/Gallup Index of Investor Optimism survey* asked U.S. investors a series of questions about their spending intentions in the months ahead, and provides some interesting answers.

Investor Income Expectations

Four in 10 investors (41%) expect their incomes to increase over the next six months, while only about 1 in 20 (6%) expect their incomes to decrease. These expectations are essentially the same as they have been in November for the past three years.

Investor Spending Intentions

Twenty-two percent of investors say they plan to increase their overall spending over the next six months, while 14% expect to decrease it. This difference between the percentage planning to increase spending and the percentage planning to decrease spending (a margin of +8 percentage points) is much better than last year, when 16% of investors said they planned to increase spending and 18% planned to decrease it (-2 percentage points). There was a -6-point difference in 2002 and a -13-point difference in 2001.

Spending on Major Purchases

Similar to the past few years at this time, 17% of investors say they intend to increase spending on major purchases during the next six months, and 28% plan to decrease spending on major purchases. This -11-point difference is a slight improvement over recent years: -14 points in 2003, -20 in 2002, and -17 in 2001.

Travel Plans

Twenty-one percent of investors say they plan to increase their travel over the next six months, compared with 16% who plan to decrease their travel. This difference of +5 percentage points is not as good as last year's +12 points. Last year's positive margin was up substantially from +5 points in 2002, and that difference was up from -4 points in 2001.

Good News for High-End Retailers

Investor spending intentions appear to be much better than they were in November of the past several years. This seems logical given that investor households are less likely than other (lower-income) households to be significantly affected by high gas prices and the weak job market. The recovery of the stock market and the benefits of lower taxes also suggest something of a positive "wealth effect."

These investor numbers are good news for high-end retailers, who can likely expect two positive outcomes: stronger sales and firmer prices. Although many observers assessing holiday sales numbers tend to focus only on the volume of retail sales, every retailer knows that profits are the result of both volume and price. While lower-end retailers will increase their sales by lowering prices, and thereby lowering profits, just the opposite is likely to occur for retailers serving upscale customers.

*Results for the total dataset are based on telephone interviews with 805 investors, aged 18 and older, conducted Nov. 1-14, 2004. For results based on the total sample of investors, one can say with 95% confidence that the margin of sampling error is ±4 percentage points.

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