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Economists: Christmas Sales Will Fall Unless They Rise

Irwin M. Stelzer

Go into almost any shop and hear Christmas carols and read signs trumpeting enormous discounts. Unusual, since the scramble for discounts traditionally begins after, not before, the first turkey has made the ultimate sacrifice to celebrants of Thanksgiving. By the end of next week, 45 million turkeys will have moved from farm to plate to palate, and the discount wars will be in full flow. Best Buy, the recovering appliance chain, has vowed to match the prices of discounter Walmart’s, which in turn pledges to undersell Best Buy and everyone else who dares to compete with it during what it is predicting will be a shopping season battered by political paralysis, government spending cuts and a weak recovery. Lest those pledges of competitive mutual assured destruction result in a downward price spiral to zero, the various sellers will offer slightly different, difficult-to-compare models, a ploy that will not prevent margins from becoming razor-thin.

Still, slight profits are better than none at all. Most merchants can live with thin margins if they have to, so long as merchandise is flying off the shelves. That is especially important this year: retailers’ inventories shot up recently, and will leave stores with unwanted stocks of unsold goods as they enter the new year unless trade is brisk.

Therein lies a tale of the weakness of our forecasting and polling tools. We know that consumers are in a sour mood, gloomier than they have been in some time. So they tell pollsters. But we know, too, that consumers don’t always behave as they tell pollsters they plan to. A poll by the National Retail Federation produced considerable gnashing of teeth by its members: consumers say they plan to spend 2% less than they did last year. Analysts at Morgan Stanley say that this year’s holiday shopping season will be the weakest since 2008, meaning that retailers will be scrambling for a larger slice of a shrinking pie. Or so the bank believes.

But most economists expect consumers to do what their economic models say those consumers will do once fortified with their Thanksgiving dinners and after surveying the bargains on offer, rather than follow up on their abstemious intentions. Plug a variety of variables, including recent increases in share prices and after-tax incomes into economists’ somewhat different models, and out comes a forecast of a more-than 5 percent increase in sales this month and next, the largest gain in eight years. Economic models have not been sure guides to the future in the past, but neither are they always fallible.

And in this case, there is reason to give them some weight. The American economy is in the midst of a battle. In one corner, wearing red-white-and-blue trunks, are the politicians and policymakers. They are battling to produce a budget, both for the next year and for years to come, with accompanying forecasts of apocalypse soon if their opponents prevail. Deficits are falling, which pleases Republicans but has Democrats arguing that the economic recovery is too weak to tolerate cuts in government spending. The disagreement won’t produce another government shutdown, or the threat of default when the debt ceiling is reached. But the politicians will take things to the brink, making consumers more than a little uncertain as to whether future policy will accelerate the recovery, or slow it further.

They also worry about the effect of congress’ rollback of the food stamp program, affecting more than 47 million people, and its failure to renew the extension of unemployment benefits being paid to almost five million out-of-work beneficiaries. Most important, consumers are facing enormous increases in the rates they pay for health-care insurance due to the mandates contained in Obamacare. “Discretionary spending will certainly be impacted by the changes in the contribution Americans will have to make for health care,” John Hartman, CEO of True Value, a hardware chain, told the Wall Street Journal.

Then there is the Federal Reserve Board. Its monetary policy gurus, devotees of “transparency,” seem unable to decide what to be transparent about. Yes, they will “taper” their asset purchases (QE3). Some day. Not yet. Perhaps next month. Unless they wait until next year. Or 2015 if unemployment remains above 6.5 percent. Or is it 5.5 percent? No one knows, so best to sell bonds and drive up interest rates, which is the opposite of what the Fed wants to happen just now.

Facing off against the politicians, policy wonks and their growth-stifling policies, wearing green (as in greenbacks) trunks, is the market economy.

  • The strong stock market in recent months has had what economists call “a wealth effect” — many people feel and indeed are richer. The Fed takes credit for this, as its zero-interest rate policy is driving investors into riskier assets such as shares, which are doing quite well, thank you Mr. Bernanke. Whatever the reason, wealthier consumers — those who already own shares and houses — are more rather than less likely to hit the shops, which is why retailers are looking to high-end merchandise to make their season. “It does feel like a higher-end, lower-end kind of story. The upper-income consumer is faring much better and will spend more,” Ken Perkins, president of Retail Metrics told The New York Times.
  • Thanks in part to the increase in oil and gas supplies resulting from fracking, petrol prices have fallen to their lowest level in almost three years, and the cost of natural gas has plummeted. That frees up money used to fill vehicle tanks, and keeps heating prices down, both the equivalent for consumers of a tax cut.
  • White House predictions that the recent government shut-down would slow the recovery have proved over-blown, to put it mildly, causing an up-side surprise in job creation last month. Late payments to furloughed workers — turning the short lay-offs into paid vacations — will give those workers a bit of a cash pile to use for everything from flat screens to play stations to toys.
  • Higher home prices are encouraging consumers to visit Home Depot and Lowe’s stores to buy the stuff that upgrades their now-more-valuable properties. This is not good news for apparel sellers, who are already marking their goods down by 40 percent, with more price cuts to come.
  • Consumers have paid down large amounts of debt, and enter the shopping season with stronger balance sheets than in recent years. That will almost certainly make them more willing to whip out their credit cards.

To say this is a difficult fight to call is to put it mildly. There is little sign that the politicians will abandon their battles, never mind the collateral damage they are inflicting on the economy. And the optimists’ catalogue of private sector strengths can be matched item for item by the pessimists’ list. My bet is on the private sector and on what repeated presidents like to call “the good sense of the American people,” the expression of which might not come until November 2014. We’ll know more when the tally of Christmas sales is in.

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