US holiday spending to suffer worst plunge since pandemic over tariff fears, inflation

U.S. holiday spending is projected to see its sharpest decline since the pandemic, with a PwC survey indicating a 5.3% average per-shopper decrease to $1,552, driven by inflation, high living costs, and tariff concerns, notably impacting gift spending (-11%) and Gen Z's budget (-23%). This outlook creates significant demand uncertainty for retailers, evidenced by mixed corporate forecasts, despite easing tariff concerns since the survey's June/July completion and Gen Z's non-transactional increase in store traffic.

Analysis

U.S. holiday spending is projected to decline for the first time since 2020, with a PwC survey indicating a 5.3% drop in average consumer expenditure to $1,552, driven by persistent inflation, high living costs, and tariff concerns. The pullback is most acute in gift spending, which is forecast to fall 11% to $721. A significant generational divergence is apparent, as Gen Z consumers plan a steep 23% reduction in their gifting budgets, citing deteriorating personal financial situations, while older cohorts expect to maintain or slightly increase spending. This creates a bifurcated and uncertain demand environment for retailers, as reflected in their varied corporate guidance. While Walmart and Abercrombie & Fitch have raised their outlooks, suggesting confidence in their value proposition, Mattel slashed its forecast, indicating vulnerability. Concurrently, Target, Best Buy, and Home Depot have maintained their forecasts, signaling a cautious stance. It is important to note that the survey was conducted in June and July, and an easing of tariff uncertainty since then could potentially moderate this negative outlook on actual consumer behavior.

Key Decisions for Investors

• Investors should exercise caution in the consumer discretionary sector, given the headline forecast of a 5.3% spending decline, with particular scrutiny on companies heavily reliant on gift-giving categories like toys and electronics.
• Consider overweighting retailers that have demonstrated resilience by raising guidance, such as Walmart (WMT) and Abercrombie & Fitch (ANF), as they appear better positioned to capture value-oriented consumers than peers like Mattel (MAT) which slashed its forecast.
• Firms with high exposure to the Gen Z demographic face heightened risk due to this cohort's planned 23% budget cut, though their increasing in-store foot traffic may present opportunities for retailers with strong experiential models.
• Monitor upcoming economic data closely, as the survey's June/July timing may overstate the negative impact of tariff fears, potentially creating upside if consumer sentiment has improved and actual spending proves more robust than predicted.