Holiday Spending: The Key To Economic Recovery?

By Andrew Beattie | October 26, 2009 AAA
Holiday Spending: The Key To Economic Recovery?

Although it has been a brief item in news reports for years, the consumer spending rates are now getting intense scrutiny. With recessions and economic downturns, as with stocks, calling the bottom is a very imprecise science most accurately practiced in retrospect when it doesn't matter anymore. Consumer spending is one statistic that economists and other interested parties use to decide how we're doing and, more specifically, when we can consider ourselves in an upswing. (For more, read Consumer Confidence: A Killer Statistic.)

Simple But Effective

The measurement of consumer spending is a very basic one. All retail sales โ€“ retail only, no houses or automobiles โ€“ are taken together and compared to the retail sales at the same time in previous years. This allows economists to assign a percentage increase or decrease as well as a gross figure for the value of all sales. More precise breakdowns are done for specific sections of sales, for example TV sales, but the reported figure is almost always the big picture measurement.

Which One Matters?

When it comes to holiday spending, however, nothing is as simple as it seems. Holiday spending occurs in waves and economists have taken to measure consumer spending at several different time periods to be able to better predict the final numbers โ€“ that is, how much Christmas spending stores and the economy can expect. These measures start right after the "back to school" spending measure which isn't usually included in holiday statistics.

Santa Right Next to Skeletons

Although it depends on who's measuring, the first important period ends in October. This is when the well-organized segment of society starts holiday buying to beat the rush. This is one of the reasons you can find a Christmas trees for sale right beside severed hands and Halloween candy. Some, it's true, may do their shopping in August or even January, but to an economist, they're just an outlying anomaly that can be ignored. By comparing the October rush with previous years, we can look at similar years and draw relationships. Robust October sales correlate with strong overall consumer spending years and vice versa. Another measure is taken around Thanksgiving and several in the weeks before and after Christmas. (To learn about cutting down on holiday costs, read Avoid Overspending This Holiday Season.)

What Does It Tell Us?

Like a machine gun, statistics can be dangerous things in the wrong hands. The general belief is that consumers spend more when they feel confident in their own finances and the economy. When people are freer with their money, then things are on the way up.

You may, however, notice a problem with this. In 2007, consumer spending was good, yet the sub-prime mortgage crises was hiding in the chimney to bring surprises the following year. Also, people not spending isn't necessarily a bad thing. The less people spend, the more they potentially put into savings. The more there is being saved, the more investment (directly or through banks investing depositor's cash), and the more sustainable the recovery.

In short, consumer spending simply tells us whether people spent more or less than in another year. The conclusions drawn from it vary widely from person to person. (For additional reading, check out Using Consumer Spending As A Market Indicator.)

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