What the year’s most important retail period can, and can’t, tell advisors about the US, Canadian economies
Black Friday grabs headlines. B-roll footage of crowded stores, overworked delivery drivers, and the occasional bout of fisticuffs between shoppers will underline the core story, that the holiday retail season remains the most important consumption period in North America. While these stories come with an element of entertainment value, advisors may be able to use the steady stream of consumption-related data to gauge a sense of North American consumers, the US and Canadian economies, and shifting sentiment on equity markets.
Neil Shankar, economist at CI Global Asset Management, explained the role that holiday retail plays as a bellwether for consumer and investor sentiment in North America. He outlined what we’ve seen so far from a year where tariffs, inflation, and economic slowdowns have impacted consumers in the US and Canada. He explained, too, what advisors can watch out for in retail data to make up for reporting gaps caused by the recent US government shutdown, and how they might see retail data releases come to impact equity markets.
“In the US, consumer spending accounts for roughly two-thirds of GDP, while in Canada it accounts for just over half of GDP,” Shankar says. “I think because household spending makes up such a large share of overall economic activity, holiday retail trends provide an important read not just on the consumer but also on the broader economy. And if spending is strong over the holiday period, it usually signals confidence and healthy household balance sheets. On the flip side, if we see weak spending during that time, it's a clear sign that consumers may be pulling back and that often foreshadows slower economic momentum more broadly.”
Ahead of the big holiday spending rush this year, Shankar predicted a slower retail season in Canada. He notes that in addition to the economic uncertainty we’ve seen related to tariffs, many Canadians have recently faced renewals on five-year fixed rate mortgages and are paying more to service debts taken on during the zero-rate period following the pandemic. That pressure on personal balance sheets might see slower spending among most Canadians.
Shankar does expect, though, that higher income earners in the US and Canada will actually spend more. A combination of strong equity market performance, stronger resilience, and the capacity to keep pace or exceed inflation in their earnings has made that upper decile of earners into an even greater consumer force. While on aggregate he says we may see a slowdown among all shoppers, Shankar expects the top end of earners to prevent a total collapse of holiday retail.
Looking at Canadians’ consumer sentiment, Shankar cites Bank of Canada surveys from August which found that tariffs and trade tensions are still creating a degree of uncertainty among Canadians that may give them pause in their spending. At the same time, the political nature of these economic headwinds has resulted in a strong ‘buy Canadian’ trend among consumers. Shankar says he’ll also be watching for signs of how that professed preference plays in purchases.
South of the border, Shankar says that retail data releases may have an outsized impact in the context of the recent US government shutdown. That political impasse has stalled key data reports from October and will result in more cursory summaries of jobs and inflation data from that period. He stresses his team’s use of bottom-up data in their research processes and notes that traffic data released by major retailers, for example, can offer some guidance for asset managers.
In a fluid economic and political environment, he says that these more real-time indices can be useful. At his own firm, Shankar explains, a team of retail sector specialists will track these dynamics in real time, looking at category level demand, pricing behaviour, inventory management, and shifting consumer preferences to understand what’s driving overall consumption patterns. Despite his confidence in that team’s ability to read real-time data, he notes that the lack of top level trend reporting from the US in October could still result in some surprises.
As advisors use holiday retail to gauge equity market sentiment about the retail and consumer discretionary sectors, as well as the wider economy, Shankar argues they should be looking at the different spending levels across different income categories, noting that if higher income households in the US begin to pull back that could be a very worrying sign indeed. As they make these observations, he says, they should also practice a degree of media hygiene with their clients, ensuring that the tendency to overstate holiday retail doesn’t result in rash portfolio decisions.
“I think the most important thing to communicate to clients is that they shouldn't overreact to any individual headline,” Shankar says. “Holiday retail headlines, from my experience, can be noisy and sometimes even a bit provocative and ultimately may not tell the full story. Even if some categories within holiday spending show weakness, others are likely to show strength, and no single headline or data point will capture the whole story. I think on aggregate, we expect consumption will hold up but the details will matter and it'll be important for advisors to put these underlying trends into context for clients.”
