What should we expect this holiday shopping season?

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One week from now, the holiday shopping season fires up in a big way. Predictions for how good or bad it will be have been all over the place, ranging from a net drop in spending according to Morgan Stanley to a record-bursting rise if you believe accounting firm Deloitte. It’s been impossible to figure which was more likely, although Barataria staked a claim to the stronger end before anyone else. We’re starting to get some data in and it looks like the optimists were right. This might be a good year after all.

Where do we get that claim? Let’s start with the low end of the predictions, Morgan Stanley, which was predicated on weak retail sales even before the shutdown. We learned this week that October saw a big rebound in retail sales, especially towards the end of the month. The case for the low end appears to be broken.

The reason given for the turnaround centers on low gasoline prices, currently below $3 per gallon in my neighborhood. Supposedly people found they have more money in their pockets towards the end of the month and promptly spent it. We can always hope there is that much optimism out there, but it seems unlikely at best. There may be a simpler explanation.

The chart below shows the 4-week average of weekly initial claims for unemployment insurance – basically, the rate at which people are losing their jobs. It shows a bump up at the start of October followed by an equally rapid decline, suggesting that the effects on the economy were probably temporary at best. If anything, the rate of job loss is substantially below last year at this time and half the rate at the peak of the rise in unemployment, towards the start of 2009:

People are not losing their jobs at the same pace as 2012, despite the bump up in early October.

I present this entire chart because it shows the case for optimism about as clearly as possible. When people are losing work in large numbers the effect on the economy can be multiplied. Even if you feel your own job is safe, the effect of people around you disappearing from the office or using friendly gatherings to network like all Hell is unsettling. Those with money start to be a lot more careful as long as the trends are negative.

That could have happened at the start of October, but we can see it reversed quickly. The warnings about the government shutdown and its possible effects may have been what caused a dive in retail sales in September, too. We’re living in a fragile economy where attitude is as important as anything.

It was only a year ago that consumer confidence started to rebound and people felt that the economy was expanding. If it weren’t for Hurricane Sandy, last holiday season may have been much better than it was. As confidence grows and fewer of us know someone who has lost a job recently we can expect wallets to open.

That’s the case for a stronger holiday season, and it looks better than it has in the last two months. This may work out after all. It’s still the shortest possible season in the number of days, but it’s not bad by any measure.

It’s time for a more solid prediction, now that we have the shutdown and everything else behind us. Despite all the ups and downs and the incredible range of predictions, this is looking to be the strongest holiday season in a very long time.

I say that when it’s all over, holiday sales will surprise to the upside and cause a big stock rally to end the year. You can hold me to that prediction, so let’s see what happens!