- Travel demand has surged this year, even as Americans pay higher airline fares.
- The holiday season will test consumers' spending priorities, especially amid inflation.
- Retailers are trying to lure back customers who bought a lot of stuff during the Covid pandemic.
Retailers have a new threat this holiday season: wanderlust.
Americans are returning to the skies, filling hotels, swarming theme parks — and they're showing a willingness to spend more of their money on trips.
That is setting up the fiercest holiday season battle for consumers' wallets since before the Covid pandemic, with persistent inflation already straining household budgets during retailers' make-or-break quarter. Retailers are juggling other challenges: selling off excess inventory, trying to lure consumers who already bought a lot of stuff during the pandemic and wooing shoppers who have become more budget-conscious.
For the travel industry, it's been a year of recovery. Delta Air Lines, Mastercard and Airbnb are among the companies enjoying windfalls. Other companies have also indicated a shift toward experiences and services. Live Nation reported double-digit attendance growth at theaters, arenas, stadiums and festivals. Starbucks said customers are springing for pricy drinks like pumpkin spice lattes.
"The trend towards spending on experiences continues," Mastercard CEO Michael Miebach said on a quarterly earnings call late last month. "We saw notable strength in airline, lodging and restaurant spend with a shift away from categories like home furnishings and appliances."
The pullback in spending on goods already has some retailers warning of tougher times ahead. Amazon shocked investors in late October with a weaker-than-expected forecast for the end of the year as e-commerce growth slows, and the company announced a corporate hiring freeze. Appliance giant Whirlpool cut its estimates.
Shipping giant FedEx missed expectations in its September report. CEO Raj Subramaniam said he anticipates a "worldwide recession." U.S. retail sales were flat in September, a sign of inflation taking its toll on consumers, since the figures are not inflation-adjusted.
Walmart, Target, Home Depot, Macy's and others will deliver their own updates to investors in mid-November. Walmart and Target over the summer disappointed investors when they detailed the financial toll of excess inventory.
Travel spending has soared, due in part to flexible office policies that are allowing Americans to travel more and book jaunts to Europe well into the traditional offseason.
As of September, airline ticket sales were up more than 56% from a year ago, and rose 10.9% versus the same month in 2019, according to Mastercard Spending Pulse, which measures in-store and online retail sales. Lodging sales shot up more than 38% from a year ago, and were up 42% versus September 2019.
"Taking the annual vacation, I think, is an entitlement for people," Hawaiian Airlines CEO Peter Ingram said in an interview last month. "After having been deprived of that for a couple of years when there were restrictions on the ability to move around, people are really embracing it and going out."
United Airlines CEO Scott Kirby noted that more relaxed office attendance policies are also letting people travel more.
"That's why September, a normally off-peak month was the third strongest month in our history," he said on the carrier's earnings call.
The appetite for travel is persisting despite soaring airfares, which have been fueled by a pilot shortage and aircraft delivery delays. Executives last month also said many people are even willing to pay up for more spacious seats. Airfare was up 43% on the year in the latest U.S. inflation read.
"Travel remains extremely resilient," said Anna Zhou, an economist at Bank of America Institute. Even after Labor Day, when travel normally slows down, "it's just not the case this year, especially for international travel," she said.
For now, airlines are brushing off worries about the possibility of a recession.
"While there's noise regarding whether we are headed into a recession or not or whether we may even be in one now, we have not seen any noticeable impact on our booking and revenue trends," Southwest's CEO Bob Jordan said on an Oct. 27 earnings call.
Airlines and hotels aren't seeing a slowdown in travel yet. But if a recession hits, that could jeopardize all consumer spending — and prompt even higher-income Americans to rethink big trips.
"Where we go a year from now, that's difficult to predict," Hawaiian Airlines' Ingram said.
Tim Quinlan, senior economist at Wells Fargo, expects the holiday season will be the "last hurrah" for consumers. He anticipates a 2% annual gain in holiday retail sales year over year in November and December when adjusted for inflation. That compares with an estimated 8.1% last year, and a 10.4% annual gain in 2020.
The bank originally projected a recession around Labor Day. Yet unemployment has remained historically low. The U.S. added 261,000 jobs in October, ahead of estimates.
Americans have kept up their spending by cutting back on their savings rate, racking up credit card debt and drawing down savings accounts, Quinlan said. Soon, he said, they will have to start pulling back and making trade-offs.
"People are spending more than they are making and that's sort of the definition of unsustainable," he said. "The consumer is on borrowed time."
Quinlan now predicts a recession will hit in April, May or June.
The consumer is on borrowed time.Tim QuinlanWells Fargo senior economist
U.S. credit card balances rose $46 billion during the second quarter, a 13% jump that was the highest in two decades, according to the St. Louis Fed. Both housing and nonhousing debt are up sharply since the start of the pandemic.
Credit card delinquency rates at the end of the second quarter hit 1.81%, the highest since the first quarter of 2021, according to the St. Louis Fed. But that's far below the historical average, and consumers are still sitting on healthy savings built up in the pandemic.
The National Retail Federation, a major trade group, on Thursday joined other industry watchers in forecasting more modest holiday sales – and saying some of that spending will be funded through credit card debt and savings accounts rather than income.
Jack Kleinhenz, the group's chief economist, acknowledged on a call Thursday that travel is a spending priority for more consumers, too. Yet he said he sees it as a complement, not a trade-off.
"You might say, 'Well, geez, that should take away retail sales because people will be spending more on gasoline and for travel, airline tickets,' but at the same time, people are bringing food and presents and we expect them to be spending more on outfits."
Travel may not be seeing a drop, since people often plan and pay for trips months in advance, said Jorge Barraza, an assistant professor of consumer psychology at the University of Southern California.
"It may be just the type of thing that people don't perceive how much prices have gone up and they're willing to put up with it because there's pent-up demand to travel," he said.
And, he added, seeing friends or family post about their trips on social media can motivate people to book vacations, even if it means dipping into savings.
"When you have times of stress and uncertainty, we're more likely to see that YOLO behavior happening," he said, referring to the expression "You only live once."