MORGAN STANLEY: Expect More Gifts And Pricier Gifts This Holiday Season

American consumers will have more buying power this holiday season.

According to Morgan Stanley’s Ellen Zentner and Paula Campbell, US households have about $US129 billion more discretionary income — money left over after tax payments, interest payments, and spending on necessities like food and transport — this year than last year.

That’s a healthy 4.3% year-over-year increase.

This chart shows the jump from last year in discretionary income.

Lower gas prices have also increased discretionary income, the economists note. Gas prices at the pump have fallen with oil on concern that a slowing global economy is reducing demand. November wholesale gasoline prices fell to $US2.22 per gallon, the lowest level in four years.

“If wholesale prices at that level are sustained through year-end, retail gasoline prices across all grades could average just under $US3.00/gallon in 4Q this year compared with $US3.37/gallon in 4Q13 – a decline of 37 cents/gallon,” Morgan Stanley notes. “Such a move would free up more than $US40 billion in consumer spending power in

Q4 compared with Q4 2013.”

Even with these gains, the economists note that more cash in hand does not necessarily mean more spending. The consumer confidence reading for September missed expectations after four straight months of gains, and Fed chair Janet Yellen noted in her most recent press conference that households are not very optimistic about the prospects of higher incomes.

All this means more cautions spending.

But here’s what the economists conclude: “Nevertheless, the gains in income, even if much of it is saved, will likely be expressed in the form of generosity with more and/or higher-dollar gifts under the tree this year. That is what early reads on the holiday sales outlook are picking up,and that is what retailers are counting on.”

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