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Wells Fargo Senior Economist on what to expect from holiday retail sales

Wells Fargo Senior Economist Tim Quinlan joined Yahoo Finance to discuss his holiday sales outlook and what it means for the future of the retail sector.

Video Transcript

MYLES UDLAND: We've seen the US consumer really hold up through the fall of this despite a lack of additional stimulus after the CARES Act expired in August. And Wells Fargo thinks that the holiday shopping season could be a record when it comes to the increase over the prior year. Joining us now to discuss is Tim Quinlan. He's a senior economist over at Wells Fargo.

So Tim, I guess, let's just start with outlinting the thesis that you guys have here, your expectations for the holiday shopping season, and what's been driving kind of this view as we head towards this crucial period for retailers.

TIN QUINLAN: Sure, yeah, so the kind of the backdrop here is this environment in which consumers aren't able to participate in a lot of services and activities. So, in many instances, if you're trying to go out to eat, it's limited seating. And, you know, travel is off in many instances.

And that has resulted already in this big shift to kind of goods related spending. And that was evident in the GDP report numbers yesterday, where you see durables growing, you know, 80 something percent at an annualized rate in the third quarter. But, you know, the overall level of services is still about 7% shy of its prerecession peak, even though broad measures of retail sales and other durable goods spending are well above their prerecession peak.

So that's kind of the backdrop. And I guess, the big number takeaway from our report is, you know, our math gets us to about a 9% year over year growth in holiday sales, which, if realized, would shoot the lights out in terms of record growth rate.

MYLES UDLAND: And so I guess, does it really come down to what you I guess would just call the mix on what holiday gifts tend to be? They tend to be more goods relative to services. And I guess if someone said, OK, record sales, but what about the overall state of the consumer? How would you kind of respond to that?

TIN QUINLAN: Yeah, so you know, we begin our report by saying, you know, it's not that the consumer is in great shape. They're not. It's not that retailers are in awesome shape. They're certainly not. But it's just this sort of odd combination of how things work.

And we're not cherry picking here and trying to find the categories that are out. We've used the same exclusions to define holiday sales for years at Wells Fargo. And our particular cocktail of retail sales subcategories isn't very different from what other groups use. The National Retail Federation is probably the official yardstick of this stuff. And I think theirs is almost the exact same categories as ours.

But it excludes things like gas stations. Well, gas station sales stores are one of the most down categories of overall retail sales. That also excludes restaurants, where you've also had a lot of weakness. These are traditional components of holiday sales. But, you know, it does include some other areas that are doing well, including grocery store sales, which have been a net beneficiary of some of the cutbacks in the restaurant space.

And it also includes, of course, online sales. We correctly predicted in our outlook piece for last year that it would-- that holiday sales 2019 would mark the first year in which e-commerce commanded the largest overall share of spending. And that was the case. It's certainly going to be the case again this year. It'll probably end up setting a level that will be hard to live up to in future years.

DAN ROBERTS: Tim, Dan Roberts here. We're talking about the e-commerce portion of the holiday shopping season. We've obviously discussed to death here on this show, you know, the huge e-commerce surges that a lot of brick and mortar chains have seen, thanks to the pandemic. I mean Amazon is obvious, but then there's Best Buy. You know, there's Urban Outfitters, Target. Take your pick-- Walmart, Dick's Sporting Goods.

So with all that being said, I just wonder what the effect of Amazon's fall-- Amazon Prime two days, Prime days, will be on the holiday shopping season. Because there was some fear that a lot of people who might have spent a lot come holiday season, now it gets pulled forward, and they spent it on Amazon Prime Day instead. And I'd ask, as part of that question, on balance, will the pandemic and that e-commerce surge the pandemic has prompted end up helping or hurting the holiday season to be bigger than in the past or smaller?

TIN QUINLAN: Yeah, Dan, great points there. And we're banking on a soft November and December. And you might think, wait a minute, you just said 9% record sales. If we had an ordinary-- if you look at the average November change and average December change, if you simply applied that to where we are now, you would be looking at year every year holiday sales figures north of 11% or 12%.

So we're already anticipating, on a seasonally adjusted basis anyway, seeing those monthly increases for November and December dropping off. We don't yet have October figures. Our guess is that it will likely be at least as strong as other October's. We're actually banking on it being a little bit stronger.

As you mentioned, there's Prime Day and everybody puts up their competing sales that day. And I think you're right that that's going to pull forward some demand. And that might end up meaning, you know, this "shipageddon" problem with e-commerce getting everything shipped in November and December. It might not be as bad as people fear because some of that shopping has already been taken care of.