Three Reasons Why Consumer Spending May Be Weak This Holiday Season – Published in Noozhawk on Monday, December 10, 2012

Black Friday got its name because, historically, the day after Thanksgiving was when retailers crossed over from showing a loss for the year to showing a profit (moved into the black). While that’s no longer necessarily true, Black Friday lives on more as a day for sales than anything else. This year, in particular, retailers may struggle, despite brisk traffic on Black Friday and Cyber Monday (the Monday after Black Friday when online retailers offer sales), for three key reasons.

The Fiscal Cliff

The fiscal cliff — the expiration of the Bush-era tax cuts and new spending cuts scheduled to go into effect Jan. 1 — have put everyone on edge. Consumers are reluctant to spend any extra money because they fear higher taxes and the negative impact of the fiscal cliff on the economy. The Congressional Budget Office has already stated that if the fiscal cliff is not dealt with, meaning that the Bush tax cuts are extended and the spending cuts are delayed, the U.S. economy will fall back into recession early in 2013. Consumers fear the loss of their jobs, higher taxes and other potentially damaging effects to their income. As a result, it is likely that they will spend less this holiday season.



Congress and President Barack Obama are haggling over possible “solutions” to the fiscal cliff, but negotiations seem to have stalled, with no clear direction. I see three possible outcomes, none of which will really address the fiscal cliff well:

» Congress and Obama do nothing, in which case taxes rise across the board, spending cuts resulting from the 2011 debt-ceiling increase go into effect, and the economy goes back into recession

» Congress and Obama extend the tax cuts for everyone and delay the spending cuts, resulting in ever-increasing budget deficits and the national debt, both of which are rising at unsustainable rates

» Congress and Obama compromise on something in the middle, meaning some tax increases and some spending cuts. This would likely result in a recession, although maybe not as deep as if all taxes increased and all spending cuts went into effect. It also would still mean that budget deficits and the national debt will continue to grow at an unsustainable pace (although somewhat slower than if all Bush tax cuts remain in place and no spending cuts went into effect).

Again, none of these outcomes will result in an effective solution — one that would prevent a return to recession while dealing with budget deficits and the national debt in a meaningful way.

Weakness in the Economy

Economic growth in the United States is weak. Although growth was revised up for the third quarter to 2.7 percent annualized, we are still not experiencing the level of growth required to sustain full employment. As a result, consumers are uncertain about the economy, their jobs and their ability to continue to earn. When uncertainty like this exists, consumers tend to save more and spend less. This is exactly what we have seen; consumer spending has been weak and savings has increased.

In addition to increased savings, consumers have been using their money to pay down their debts, another sign of consumer concerns about the future of the economy and their ability to meet their obligations. As long as the economy continues to be weak, we will not see consumer spending improving. This certainly will have a negative impact on holiday spending.

Tightening Credit

Credit-card companies, banks and other providers of consumer credit have been tightening their standards since the financial crisis and recession of 2008 and 2009. As a result, it has been increasingly difficult for consumers to access credit. The U.S. economy operates in large part on credit, so any time access to credit is limited, the economy is going to suffer.

Consumers who cannot access credit are forced to pay for purchases with savings. This makes the decision to purchase items, especially gifts at the holidays, a lot tougher. Consumers will always spend more when they have easy access to credit — when they can buy now and pay later. When they have to write a check or pay cash for purchases, they certainly think about the purchase a lot more. The result is lower consumer spending during the holidays and, in general, lower consumer spending on an ongoing basis. This certainly will hurt spending this holiday season, and threatens to restrict economic growth indefinitely (70 percent of U.S. gross-domestic product comes from consumer spending).

When the impact of these three key areas of concern are understood, it is clear that consumer spending is very likely to suffer this holiday season. Lower consumer spending will, of course, hurt the economy, but it will also hurt corporate profits. Lower corporate profits will reduce hiring, spending on capital equipment, and tax revenues to the government. Lower corporate profits will also hurt stock market performance. Lower stock values will, in turn, lower consumer spending further, as consumers feeling that their net worth is decreasing will be even less comfortable spending their savings.

The wide-ranging impacts of lower consumer spending should be well understood by Congress and Obama as they debate the various possible solutions to the fiscal cliff. Unfortunately it seems they are more interested in party politics — in who wins and who loses, rather than what is best for the country and its citizens. The reality is that, unless they come together and fix these problems, we are all going to lose.  Read on Noozhawk

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