Ancient Roman soothsayers killed pigeons and examined their entrails to predict the future. In the modern United States, we tabulate retail sales immediately after Thanksgiving.
The two forecasting methods are about equally reliable, yet we adhere to our token rituals as strongly as the Romans did to theirs — for about the same reasons. When much is at stake, people are desperate for any inkling about what the future holds, no matter how untrustworthy the method.
Smart Roman leaders probably knew that pigeon guts were an unreliable forecasting tool. But when victory or defeat hung in the balance, little could be lost by slaughtering a few birds. Moreover, going through the ritual probably reassured average Roman citizens that their leaders were doing all they could to ensure the fortunes of the nation.
Historically, the amount of merchandise that retailers sell in stores on the last Friday in November or over the Internet that weekend is not a reliable predictor of what total holiday sales will be, much less the future course of our nation’s economy.
One problem is too many related factors that vary over time are at play to be able to establish any statistical link between sales in a three-day period and overall holiday sales. These include structural changes in retailing, among them the emergence of big-box stores and online sales.
Another complication is a business variation of the Heisenberg uncertainty principle in physics. That principle said that the very act of measuring a variable in quantum physics could alter what you are measuring. In retail sales, the more media attention paid to the importance of “Black Friday” sales, the more emphasis retailers put on such sales and the more ordinary consumers become convinced that great bargains can be had. But the money spent in a much-hyped weekend may be money not spent in succeeding weeks.
The media, especially television, love the hype because it makes for dramatic news footage of avid bargain hunters pouring through doors at some ungodly hour of the morning. And Wall Street pundits always are happy to get on camera opining about what different sales indicators portend.
The predictive value of all this is minimal, yet many noneconomists still focus on it. As it was for the Romans, much is at stake. We are in the harshest recession in decades, with unemployment and underemployment at levels not seen for 75 years. People want to know when things will get better.
Household consumption spending typically takes up two-thirds of total national production of goods and services. Hence, changes in such spending do affect economic activity nationwide, including employment levels.
If retail sales rise, it gives hope that economic activity is picking up, that business will get better and that unemployed people once again will have jobs. Hope springs eternal in the human breast.
But, once again, the U.S. economy is on the horns of a desperate dilemma. In the past decade, consumption spending grew to an unsustainable level. The reverse of that is that household savings fell to levels that harm investment and future economic growth.
Easy “cash-out” mortgage refinancings fueled some of that. A Federal Reserve study, co-authored by Alan Greenspan himself, found that in 2004, 6 percent of total household spending was financed from housing equity. This could not go on indefinitely, especially if mortgage lending tightened or real estate values fell — both of which happened.
For our nation to be economically healthy in the long run, consumption spending needs to drop and savings to rise. But that shift will be painful in the midst of a painful recession and in itself will prolong hard times. Unfortunately, there is no easy policy solution.
© 2009 Edward Lotterman
Chanarambie Consulting, Inc.