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Consumer spending is sky high, will it continue in 2019?

Holiday shopping hit a six-year high in 2018, according to a new report by Mastercard. Experts say the consumer economy will face headwinds in 2019. (Photo: Pixabay)

The 2018 holiday shopping season is not quite over but it is already on track to be the strongest in six years.

American consumers spent over $850 billion in-store and online, according to a report published by Mastercard Wednesday. That represents a 5.1 percent increase in consumer spending over the 2017 holiday season.

Online retail saw even greater growth of more than 19 percent over last year with Amazon boasting record-breaking holiday sales and the delivery of more than one billion packages free of charge through its Prime service.

In other words: Americans are shopping.

Clothing and apparel sales were the strongest since 2010. Home improvement spending was up 9 percent over last year and home furnishings grew at 2.3 percent. The retail losers included department stores and electronic appliances.

Even with the news dominated by stories of market volatility, trade wars, dysfunction in Washington and speculation of another economic recession, Americans found plenty of reasons to celebrate.

Consumer confidence has remained at its highest levels since before the great recession. Job growth is projected to continue into its 99th straight month, wages have been rising slowly but steadily and many households saw extra take-home pay from the tax cuts.

Lower gas prices through December also contributed to the holiday spending spree. AAA reported national gas prices averaged $2.37 this month, the cheapest December pump prices since 2016.

Not even poor weather conditions stood in the way of retailers finishing 2018 on a high note. It may have actually helped the traditional brick and mortar stores, like Walmart and Target, who have been investing more to meet consumers' demand for both in-store and online shopping, or "brick and click."

Amazon dominated e-commerce, accounting for about 81 percent of online sales in the weeks leading up to Christmas, according to research by Edison Trends.

Other "brick and click" retailers are catching up, though. Walmart showed a significant 86 percent year-over-year expansion in online sales during the three weeks before Christmas and Target saw a 38 percent increase in online sales.

"There's never been a better time to be an American consumer," said Jason Brewer, vice president of communications with the Retail Industry Leaders Association. "You have so much power at your fingertips to compare prices and to shop around and retailers are meeting that challenge."

However, following a solid holiday season, the economy will be facing difficult headwinds in the new year.

"Right now the enemy in 2019 is uncertainty, specifically tariffs and this trade war," Brewer insisted. "The sooner we resolve that issue the stronger the economy and retailers are going to be in 2019."

Over the past year, the U.S. has imposed tariffs on billions of dollars worth of foreign goods from electronics and food to steel and aluminum. The Trump administration warned earlier this month that it will raise tariffs from ten to 25 percent on $200 billion of Chinese goods by March unless the two countries can reach an agreement.

"It's going to be a tricky year. There's no doubt about it," said Jack Kleinhenz, chief economist with the National Retail Federation. "I think we're still going to see broadly positive growth. It just may not be at the same pace we’ve seen in the last couple of quarters."

Earlier this year, the National Retail Federation forecast total U.S. holiday retail sales would rise between 4.3 and 4.8 percent in November and December to total as much as much as $720 billion. Mastercard's $850 billion figure represents sales from Nov. 1 through Dec. 24.

In the new year, job growth is likely to slow down as the economy nears full employment. November unemployment was at a historically low 3.7 percent and the number of new jobs created averaged around 200,000 per month. The tighter labor market should lead to higher wages for workers, which would further boost consumer spending, but wage growth has remained sluggish throughout the recovery.

Additionally, the fiscal stimulus and the novelty of the corporate and individual tax cuts, which provided a boost to the economy this year are probably not going to be as effective heading into the first quarter of 2019, Kleinhenz suggested.

The individual tax cuts passed in Dec. 2017 are set to expire in 2025. The Federal Reserve has been steadily increasing interest rates, raising the cost of borrowing throughout the economy.

The Fed's rate hikes led to fits on Wall Street this week, where investors also expressed fears over political uncertainty in Washington and the trade wars.

The Dow Jones industrial average and Nasdaq composite index had their worst Christmas Eve in market history and the S&P 500 closed out its worst Christmas Eve since the Great Depression. On Wednesday, stocks saw a dramatic surge.

By midday Thursday it looked like they might give back everything they gained in the post-Christmas rebound, but all three ended the trading day up. The Dow was ahead 1.14 percent, the Nasdaq was up 0.38 percent and the S&P 500 gained 0.86 percent.

Main Street is relatively insulated from the wild gyrations on Wall Street. But the market volatility could still factor into consumer spending in the new year indirectly and deflate recent years' high levels of consumer confidence.

"That doesn't necessarily have an immediate impact on their ability to spend," Kleinhenz said. "It certainly has a potential to impact people's thought process about their future and future savings."

Consumer confidence dropped by more than eight points this month, reaching the lowest level since July.

Those feelings have less of an effect on the health of the consumer economy than employment and wages. According to the Bureau of Labor Statistics, employment is projected to grow at a slower than average rate of 0.5 percent through 2024.

Wages and salaries were up 3.1 percent in November, on a yearly basis. It marked the strongest wage growth in a decade and still barely kept pace with inflation.

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