The Friday after Thanksgiving has become a bellwether day for U.S. retailers and retail-sector analysts, who look at this single day’s sales figures for early indications of how the holiday shopping season will pan out.
This year, expectations are positive, with the National Retail Federation predicting November-December sales 2.3 percent above year-earlier levels. While this is welcome good news, it should not blind us to the magnitude of problems that the global economy still faces.
The problem is that the further things get out of balance during the irrational exuberance of an inflating asset bubble, the more painful and drawn out the return to sustainable levels of consumption. And things got far out of whack in our country over the past decade.
As a percentage of gross domestic product, personal consumption expenditures stayed within a range of the low to mid-60s from 1947 through the 1990s. But from 2001 to the present, personal consumption spending averaged near 70 percent. In 2005, at the height of the housing bubble, cash-out mortgage refinancing funded about 6 percent of such consumption spending. That was a classic case of unsustainability if there ever was one.
The recession has not changed that proportion, which has remained over 70 percent since things began to fall apart in the third quarter of 2007. Inflation-adjusted GDP for the U.S. fell by 3.7 percent from its high in mid-2007 to the trough of 2009. Personal consumption fell only 2.5 percent. Both of these drops were small for a recession initiated by a financial crisis the size of the one we are in.
Moreover, both have recovered so that consumption has regained all lost ground and GDP is within 1 percent of the level reached in 2007 before the recession began. But the mildness in GDP and consumption drops was overshadowed by the near-doubling of the unemployment rate in the first year of the recession and its harsh persistence since then.
Holiday season purchases often are, by their very nature, not necessities of life. So it was entirely predictable that they fell more than total consumption. They dropped by 4 percent from 2007 to 2008 and recovered by only a half a percent from 2008 to 2009, even as overall consumption regained lost ground.
Even if holiday sales do grow by the 2.3 percent predicted by the Retail Federation, the dollar amount adjusted for inflation will remain below the pre-recession peak. But even modest growth is better than stagnation.
The knotty conundrum is that for our economy to be healthy in the long run, consumption must return to the fraction of output that was common over the half-century after World War II. Savings, and hence investment in new machines, factories and other long-term productive inputs, must rise.
Such a transition is never easy, however. As consumers retrench, producers avoid automatically taking up the slack by investing in new equipment precisely because consumer spending, and hence producer sales, are weak.
The neoclassical economics that prevailed before the mid-1930s taught that “supply created its own demand.” Thus there always would be sufficient demand from some part of the economy for full output to prevail, except for short-run dips. Market forces would end recessions.
John Maynard Keynes demonstrated why that doesn’t always happen, and the history of Japan since 1989 shows how long a slump can last, especially when exacerbated by episodic bad policy choices. So a consistently brightening future is not guaranteed.
Moreover, financial danger lurks around the globe from still-troubled U.S. banks haunted by bad mortgage loans to a vulnerable euro system. Emerging information from a long-term federal investigation of illegal practices in hedge funds and other financial institutions shows the depth of problems in our system. And global political risks are widespread, including on the Korean peninsula. So we are not out of the woods in terms of a renewed financial crisis.
But let’s accentuate the positive. The 875,000-job increase in payroll employment so far this year is better than none, even if not enough to drop the unemployment rate. And even modest increases in consumer spending are better than none at all. Confidence in both households and businesses is essential to growth. In both sectors, it strengthens more rapidly under any growth than in its absence.
Moreover, the sorts of medium-term adjustments from consumption to saving are easier to make when business activity and income are growing, however slowly, than when shrinking.
So let’s all hope that the moderate optimism reflected in retail forecasts is borne out by actual sales. That will be something to be thankful for, even after Thanksgiving itself is past.
© 2010 Edward Lotterman
Chanarambie Consulting, Inc.