Black Friday Hype Can’t Overcome Economy

Early reports on the day after Thanksgiving indicate the annual Black Friday holiday shopping season is off to a slow start.

An analyst on SunTrust even declared Thanksgiving shopping a “bust,” pointing to a decline in foot traffic in malls and stores. Last year, Black Friday results were also a “bust.”

The annual holiday shopping season is make or break for many retail companies. The weeks building up to Christmas account for 30 percent annual sales, and 40 percent of profits, at many retail sales outlets. Consumer spending is always driven by a certain amount of hype, but the barrage of Black Friday events, sales and deals belongs in its own alternate reality. Sales can only be as good as the underlying economy. On that fundamental, this year’s retail sales picture looks bleak.

The Christmas shopping season has become, for many, a proxy for the state of the overall economy. Given that consumer spending accounts for two-thirds of the economy and the Christmas season represents the biggest single block of this spending, this makes some intuitive sense. It also makes it subject to hype and gross oversimplification. This is compounded by interest groups like the National Retail Federation, which has a stake in the outcome of the perception game.

If you torture statistics long enough, they will confess to anything.

Last week, the Commerce Department reported that the economy grew by 2.1 percent in the third Quarter, covering July-September. The revised estimate was affected by a smaller increase in consumer spending than originally measured and a larger build-up in business inventories.

The Federal Reserve Bank of Philadelphia, along with a number of institutions, lowered its expectations for growth for the rest of the year, as well as the next two years. That Fed Bank predicts growth will be stronger in later years, but this simply follows a pattern that has developed since the end of the Great Recession. Disappointing economic news is always met with promises of stronger growth in the future.

At the beginning of this year, disappointing economic numbers at the end of 2014 were dismissed with promises of stronger growth later this year.  Just a few months ago, a Fed Bank estimated that third quarter growth would 3.1 percent (which turned out to be 2.1 percent) and 2.9 percent in the fourth. The Bank has since lowered its fourth quarter estimate to 2.8 percent.

One could spend all day unearthing and pointing out such revisions. The main point is that, for at least the past six years, the actual economy has almost always turned out to be weaker than the markets, analysts or the Fed have believed. It is generally only after steady downward revisions of past estimates that the economy has better-than-expected results.

In trying to estimate Christmas sales this year, the raw data suggests a mediocre to mildly disappointing season. According to recently released data from the Commerce Department, retail spending in October was lower than in August or September. In the last 23 years, October sales have failed to rise over August and September only 4 times, including recessions. October’s retail sales were only 1 percent higher than last year, which represents almost zero growth after accounting for inflation.

For the Christmas shopping season to have a “strong” year, consumers would have to reverse their current belt-tightening.

The U.S. population grows around 1 percent every year. Inflation is also around 1 percent every year. Taken together, 2 percent growth is the minimum needed for the economy to remain flat. How far retails sales are above or below this 2 percent baseline is the best measure for the Christmas shopping season.

Getting an accurate picture of the retail shopping seasons is complicated, though, by the outright hucksterism of the National Retail Federation. The lobby group for many brick-and-morter retail stores dominates the news media with its forecasts of the Christmas shopping season. Part of its mission, apparently, is to hype the expectation of high sales to prod consumers to shop. Another part, though, is to explain away disappointing data.

Last year, after initial sales failed to live up to its forecasts, the NRF argued that the disappointing sales were the result of a stronger than expected economy. Last year, the Wall Street Journal reported that Matt Shay, NRF President, “attributed the declines to better online offerings and an improving economy where ‘people don’t feel the same psychological need to rush out and get the great deal that weekend, particularly if they expected to be more deals,’ he said.”

The economy, it should be noted, was not improving measurably at the end of last year. GDP growth in the fourth quarter last year was just 2.2 percent, down considerably from previous estimates. This anemic growth was less than half the amount measured in the third quarter.

This year, NRF is further confusing the picture by its insistence that Christmas spending grew by 4 percent last year. According to the Census Department, though, retail sales in November and December only grew by 2 percent last year.

On one level, there is nothing wrong with NRF trying to boost its sales estimates. It probably makes its members feel better and might even induce some shoppers to increase purchases on the margin. The NRF, though, uses its forecasts and estimates to push policy positions.

Just last week, Shay argued that a possible “government shutdown” would have catastrophic consequences for the important Christmas shopping season. The organization still claims that the brief government shutdown in 2013 had a negative impact on shopping, although no data confirm that. According to the government, retails sales growth during the holidays in 2013 was slightly higher than the growth last year.

Also last week, Shay sat down with Politico and argued for levying state sales taxes on on-line purchases, even though states have very little to do with e-commerce. When Christmas sales fail to live up to the NRF’s hype this year, expect a major lobbying push from the group to target on-line retailers.

In the end, its probably best to treat the holiday season with a healthy dose of common sense. Don’t buy into the hype, stay within your budget and devote most of your energy to giving thanks for our blessings and the family and friends around us.


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