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Holiday Spending Was Up, but So What?


Reports through December 25, 2010 were up for the season as compared to last year. But that's not even close to being an economic recovery.

Editor's Note: This article was originally published at The Daily Capitalist.

The Christmas holiday shopping reports through December 25, 2010 were up for the season as compared to last year. So what? Does that mean economic recovery? I think not.

The Spending Data

Here is what Christmas spending looked like:

Year-over-year change in US retails sales, excluding autos. 2010.

Consumer Spending by Week, 2008-2010

ICSC-Goldman Store Sales

Gallup pointed out that upper-income spenders drove sales:

Upper-Income US Consumer Spending by Week, 2009-2010

The Wall Street Journal reports:

American shoppers expanded their year-end purchases this holiday season by the biggest margin since the boom year of 2005 … US retail sales, excluding automobiles, rose 5.5% between Nov. 5 and Dec. 24 compared with a year ago, according to MasterCard SpendingPulse, a unit of MasterCard Advisors that tracks sales by all types of payment.

Last year, sales rose 4.1% during the 50 day period, but those results were easy comparisons against the recession in 2008, when sales fell 6.1%. …

During the holiday season, clothing posted the strongest gain, up 11.2% over the same period last year when apparel sales were roughly flat. Electronics sales rose only 1.2% this year, as a glut of televisions drove prices down and shoppers shied away from innovations such as 3D TVs. After several years of lackluster sales, jewelry was a standout category notching an 8.4% sales gain.

Consumer Confidence

Another important data point was consumer (un)confidence. The Conference Board's report fell to 52.5, below the consensus of 57.4:

Consumer Confidence, Retail Sales Chart

This suggest that middle America doesn't believe things are getting much better.

After all the gushing about how wonderful the sales reports were, the Journal article noted that spending is still tepid, gasoline prices are rising, there are still too many stores, competition is keen with aggressive new foreign retailers coming in, cotton prices are rising, and Web sales are threatening brick-and-mortar stores. But there is an even greater barrier to consumption spending.

Will Consumer Spending Revive the Economy?

I am not impressed with the fact that spending is up for two reasons.

First, I believe the sport of shopping is an ingrained bad habit tied to former bubble-based housing wealth. People sport-shopped because they believed that the economy would continue to boom, borne as it were on the back of ever-rising home prices. It will take some time for consumers to break themselves of that habit. As I reported previously (see What to Expect From Holiday Sales), the spending patterns noted by Gallup suggest that much of the spending was from the upper-income levels (note the sales increase for bling -- jewelry).

More significant is the fact that the personal savings rate has been declining since June, from 6.2% to 5.3% in November. In light of most Americans' personal indebtedness and the lack of retirement funds, I find this rather disturbing. They are supporting their spending habit from savings.

Second, unlike other economists, I don't believe the economy will revive if consumers just start spending. If spending were all it took to lead us to riches and prosperity, then Zimbabweans would be rich. But that's not how the economy works. Yet almost all government-stimulus policies are geared to assist the average household to part with its money on the false belief that it will stimulate the economy.

To determine if such increased spending means economic recovery, we have to ask the question: Where is the spending coming from? It is one thing if it is a result of rising wages; it is another if it comes from savings. If wages were rising, unemployment were going down, housing were stabilized, savings had grown, and deleveraging were further along, then one could say that increased consumer activity was justified and economically viable. But, if as I suspect, consumers are spending mostly out of savings, then such growth is not sustainable.

Only Real Savings Will Make the Economy Grow

What the economy needs in order to grow is what Austrian economists call "real savings" and it is my belief that such savings are in short supply. "Real savings," are savings resulting from the production of goods. Much of our current savings came from the false bubble economy and the resulting housing mania. Such savings were not based on production, but rather from fiat money, or money created out of thin air, which falsely stimulated production and created fake prosperity and fake wealth. Such growth always collapses.

Let me explain what I mean.

Austrian theory economist Frank Shostak illustrates the point by the baker who produces 10 loaves of bread, sells the 10 for a dollar each to the grocer, and ends up with a profit of $2. The baker doesn't spend this money but puts it in the bank. The $2 are real savings because they were derived from production. By not spending his profit, the baker created something: wealth. This is the genesis of all wealth created in an economy. The grocer paid $10 from his real savings, and sells the loaves to consumers for $1.25 and yields a profit of $2.50 which he puts in the bank. The profit is also real savings because it ultimately comes from production.

But what if the government prints a $10 bill and gives it to Joe Consumer who buys all 10 loaves? The money is just a piece of paper. Joe gets something for nothing; his purchase was not based on wealth or money derived from production. And the consequence of the new fake money is that bread prices go up as bread becomes scarcer.

Also, the baker might think that the rise in prices reflects a greater demand for bread and causes him to expand his operations by installing a bigger oven. In fact the rise in prices was due to the increase of the supply of money and not demand. Eventually the baker will find that his extra production will go unsold and thus the real savings he plowed into the new oven will have been wasted. Thus, money printing actually causes the pool of real savings to decline.

This what happens during a Fed-created boom-bust business cycle such as the one we are now emerging from: It wastes capital, including real capital (savings).

Are Real Savings Rising?

It is very difficult to determine the amount of real savings. I use the banking system as a proxy to measure the effects of what a lack of real capital looks like. A lack of sufficient real capital would mean that debt would be high, that banks were having problems with their loans, that housing assets would be declining, that people would default on their loans, that foreclosures would rise, banks would fail, bankruptcies would rise, loan volume would decline, and the economy would stagnate. As in the present.

It appears that real savings are diminished, and that is why the economy is not recovering as easily as in past recessions. It would explain why money-supply growth from zero interest rate policy (ZIRP) isn't working as the Fed wishes. By the same theory, quantitative easing is not going to promote production and economic growth either. It's like pushing the proverbial string.

Present monetary and fiscal policies are working against the formation of new real savings by encouraging spending and consumption and discouraging savings. While the savings that consumers have been accumulating post-2008 may not be entirely "real savings" some of it is, and the fact that consumers are funding spending through their savings only serves to reduce the overall pool of real savings available to support production.

What happens when consumers stop spending their savings? You can only support more consumption by increasing production, and that takes real capital. By forcing consumption without increased real savings, the result is economic stagnation. If you combine this with arising money supply you get the added detriment of inflation. And the word for that type of economy is stagflation, which is where we are heading.

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