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Consumer headwinds won’t bring out Scrooge this holiday shopping season: Economist

Here's where consumers are planning to spend as gas prices, student loan repayments, and higher interest rates weigh on wallets.

Consumers are ready to ring in the holidays with a willingness to spend.

Over the holiday shopping season, which runs from Nov. 1 to Dec. 24, US retail sales excluding automotive are expected to rise by 3.7% from last year, according to the latest Mastercard SpendingPulse survey.

The increase highlights that holiday spending is slowing to around pre-pandemic levels. Last year, holiday sales jumped 7.6%; in 2019, holiday sales were up 3.4%.

"It's a bit of a return to a more normal environment because we have a more normal inflation environment," Mastercard Economics Institute US chief economist Michelle Meyer told Yahoo Finance. "And even though we're not totally back to normal, ... inflation is still elevated for a number of categories. ... It's just much more contained than it was this time last year."

Holiday shoppers make their way past Macy's storefront in New York during Black Friday.
Holiday shoppers make their way past Macy's during Black Friday on November 25, 2022, in New York City. (Leonardo Munoz/VIEWpress)

Consumers brace for economic 'adjustment'

The consumer is coming into the holiday season feeling the drag of high interest rates, rising gas prices, and student loan repayments, among other headwinds.

Gas prices are hurting consumers' wallets again. On Monday, the national average for gasoline in the US reached $3.88 per gallon, according to AAA. That's a 2023 high, as Yahoo Finance's Ines Ferre reported, though it's lower than prices in 2022 when gas was well over $4 a gallon.

"We have to keep a close eye on prices at the pump," Meyer said. Although gas prices are not a major concern yet, Meyer added, they often have a direct impact on how Americans perceive their spending power and how they feel about the economy.

Other headwinds like households' debt service and student loan payments are also on Meyer's radar.

Student loans returning will be "an adjustment for the economy but not a sudden or abrupt change in the economy," Meyer said.

And when it comes to the impact of higher interest rates, households' balance sheets are slightly less favorable than those of last year’s holiday shoppers, according to the report.

Last month, several retailers, including Macy's (M), warned that consumers were having a harder time paying off their credit card balances.

Read more: How a Fed interest rate hike impacts credit cards

However, Meyer said when it comes to the debt service ratio, which measures debt payments as a percent of disposable income, US consumers are "basically back to where we were in 2019."

"It's not above despite a higher rate environment, so I think households are managing it very well," she said.

Where will Americans be spending?

Some pandemic-era shopping habits have stuck around. E-commerce sales are expected to jump 6.7% compared to last year, and in-store sales are expected to increase by 2.9%.

Last year, there was "actually a very similar breakdown," Meyer said, adding that "some of the shift toward ... e-commerce has been sticky."

All those electronic splurges Americans made for their home offices in 2020 and 2021 are likely ready for an upgrade this holiday too, as electronics sales this holiday are expected to increase by 6%.

"If you kind of stocked up on a lot of new technology right after the pandemic — whether it was for your home office, or remote work, or whatever it might be — there are new items and options available now," Meyer said.

A woman in a yellow scarf walks past a closed Apple Store in Lille, northern France.
A woman walks past an Apple Store in Lille, northern France, Monday, March 16, 2020. (Michel Spingler/AP Photo, File)

Consumers are also willing to splurge at restaurants this holiday season, with restaurant sales expected to grow 5.4%, more than the 3.9% growth expected for grocery sales.

This comes as Americans are forced to make a tough decision to dine in or go out amid rising food prices. In August, the cost of groceries ticked up 3% year over year while restaurant prices went up 6.5%.

And as we saw this year with the economic boom from Taylor Swift and Beyoncé tours, Americans seem willing to spend on experiences this holiday.

"It was pretty amazing ... the extent to which people were willing and able to spend for a lot of these experiences," Meyer said. "There's many other really fun and interesting activities and experiences that could generate an additional kind of push."

"Consumers have power," Meyer added. "They have choice. They're being very clear on how and when and what they want to spend on."

*Mastercard SpendingPulse measures in-store and online retail sales across all forms of payment including cash and check and is not adjusted for inflation.

Brooke DiPalma is a reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.

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