Strong Economic Rebound Depends on More than Santa
December 22, 2009 - 2:01 PMDon't count on holiday shoppers to fuel the economic recovery.
Sales this time of year are vital to retailers, of course. But they're not nearly enough to drive the economy. Even if holiday sales exceed expectations, the broader recovery is expected to remain weak - for the rest of the year and beyond.
Here's why holiday purchases won't save the day:
- They make up a surprisingly small share of the economy. Last year, gift sales were estimated to account for less than 13 percent of the fourth quarter's gross domestic product. And Mark Zandi, chief economist at Moody's Economy.com, thinks they'll account for about the same share of this quarter's GDP - the value of all goods and services produced in the United States.
- Many consumers can't get loans. That makes it hard to buy costly items - from cars and homes to appliances and jewelry - related or unrelated to the holidays. Even as the economy returned to growth last summer, consumers borrowed 0.6 percent less from July through October, according to data from the Federal Reserve. Even if holiday sales shine, tight credit will hold back spending in coming months.
- Unemployment has hit double digits and is expected to remain near or above 10 percent well into next year, far above a "normal" rate of 5 or 6 percent. The Federal Reserve says the rate could hover around 8 percent into 2012. Americans without jobs or fearful of losing them aren't likely to splurge anytime soon.
- Households are trimming debt. Total household debt, including mortgages, credit cards, autos and other consumer loans, stood at $13.6 trillion in the third quarter of this year, according to the Fed. That's down from $13.7 trillion in the second quarter. Debt reduction is healthy for personal finances but not for economic growth: Consumers pare debt with money they might otherwise spend.
- Most Americans - 80 percent - plan to use cash for all their holiday purchases, according to an Associated Press-Gfk poll. Using cash is a way to stick to budgets and avoid impulse purchases. It suggests consumers are wary of spending freely - whether for gifts or other purchases.
While holiday sales aren't vital to economic growth, consumer spending as a whole is: It accounts for about 70 percent of it.
And usually as recoveries begin, the economy roars to life as pent-up spending is lavished on cars, clothes, homes and appliances. Consumers become an engine of economic strength.
Not likely this time.
With credit tight and joblessness high, no one expects shoppers to provide enough punch to power the recovery. The government's surprisingly strong retail sales report for November - and a decent holiday shopping season - could turn out to be a last hurrah.
"Despite the glimmer of optimism on the surface ... the economic fundamentals are weak," said Sung Won Sohn, economist at California State University's Smith School of Business.
Many economists do think the economy is growing faster now than it did last quarter. JPMorgan Chase Bank, for instance, has bumped up its forecast for growth this quarter from 3.5 percent to 4.5 percent. But that's no thanks to consumer spending, which is forecast to slow compared with last quarter. Growth is instead being driven by companies restocking shrunken stockpiles of goods.
Yet that benefit could be fleeting. With consumer spending subdued, companies won't have to keep boosting their inventories.
In part, that's why growth next quarter is expected to slow to 2.5 percent to 3 percent. Under some estimates, consumer spending could grow just 1 percent.
The economy isn't usually this weak early in recoveries.
After the severe 1981-82 recession, for instance, consumer spending rocketed at a 7.5 pace in the last quarter of 1982, when the recovery began. It averaged a robust 6.5 percent quarterly growth in 1983. And the economy surged at a blistering quarterly pace of nearly 8 percent that year.
By contrast, when the economy returned to growth in the third quarter of this year, consumer spending rose at a tepid pace: just 2.8 percent. And the overall economy grew just 2.2 percent.
And even that growth owed much to help from Uncle Sam, in the form of tax breaks to buy homes and cars.
Economists were heartened by news that retail sales grew to $352 billion in November. But historically, that figure isn't much to cheer. By comparison, retail sales peaked at nearly $380 billion in November 2007. And that was the month before the economy officially sank into the worst recession since the 1930s.
As long as consumers and small businesses remain unable or too cautious to borrow and spend - during and after the holidays - the recovery is likely to make only fitful gains.
"Unless banks become more willing to lend, there is just no way we can have a durable economic recovery," said Bernard Baumohl, chief global economist at the Economic Outlook Group.
(Copyright 2009 Associated Press. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.)