A lot of hay has been made lately about the return of the American consumer and the resurgence of retail. Yes, holiday sales got off to a bang as shoppers spent a record $52.4 billion across the Black Friday weekend — up16.4% from 2010. Yes, Cyber Monday sales also blew the virtual doors off, if early projections of $1.2 billion hold true.
But let’s not fool ourselves. Unemployment remains above 9%, serious debt woes continue to plague America and Europe, and the broader economic troubles lurk like an unrepentant Scrooge.
It’s encouraging to see consumers spending again in some form. But the headline numbers from Black Friday and Cyber Monday are an oversimplification. Investors and consumers who think the news is a sign that all is well may be sorely surprised in the near future.
Here are 5 reasons to doubt that the rosy headlines from the start to the holiday shopping season will last:
Bargains spur sales, but not profits or jobs: It’s great that holiday promotions let many consumers get the flashiest electronics at rock-bottom prices. However, don’t fool yourself into thinking that’s good for the economy.
Take electronics giant Sony (NYSE:SNE), which is set to close plants and cut TV productions after a $2.2 billion loss from its flat-screen TV division. A race to the bottom in prices has made margins razor thin.
Or take Best Buy (NYSE:BBY), one of the biggest Black Friday winners, thanks to exclusive deals and deep discounts that brought in shoppers. Best Buy slashed its seasonal hiring in half this year to just 15,000 workers vs. 30,000 in 2010 — in large part because deep discounts demand cost-cutting to make those purchases profitable. Is that a sign of economic recovery?
Incentives entice planned purchases, but don’t generate new demand: Remember “Cash for Clunkers,” the 2009 tax credit meant to spur Americans to turn in older, polluting cars for new ones? A mere 125,000 of the 690,000 total vehicles traded in under the program were actually taken off the road as a result, according to car website Edmunds.com. In short, almost 82% of the cars traded in were doomed to be sold anyway. How, then, did incentives help the auto industry? Folks just got a nice check from Uncle Sam for a decision they were going to make anyway.
The story is similar with the $8,000 first-time homebuyer tax credit that was part of the 2009 stimulus measure. No one decided to buy a home because of the measure, though some surely rushed the move-in date a month or two to take advantage of it. Both of these incentive programs show the danger of assuming discounts at retailers actually spur new spending instead of just tapping in to pent-up demand. Let’s not pretend that shoppers are out there with no intention of buying a flat-screen TV who are suddenly moved to buy one due to a $200 markdown.
The U.S. doesn’t make clothes and electronics: How many Americans do you know who work for Apple (NASDAQ:AAPL)? And how many Americans do you know who have an iPhone? The sad reality is that aside from a small group of big stakeholders, Apple does not enrich America with its gadget success. Take the $1 billion data center in North Carolina that created a mere 50 full-time jobs!
A similar tale can be told for all the Abercrombie (NYSE:ANF) and Gap (NYSE:GPS) clothes made overseas on the cheap — though at least store clerks at the mall get minimum wage to peddle the wares. The truth is we would all be better off if holiday shoppers spent all their cash on Christmas brunch at a hometown diner and generously tipped the waitresses. Or better yet, buying locally grown produce and meat to cook your holiday dinner. That kind of spending has a material impact on the domestic economy. Buying a TV from China or a sweater from Vietnam? Not so much…
Irrational exuberance is creeping in: The euro zone teeters on collapse. The U.S. “supercommittee” fails miserably to meet its obligation to craft a debt compromise, raising the specter of draconian federal budget cuts. Unemployment remains above 9%. The list goes on. Yet the stock market rallies on Monday with the Dow up over 300 points just due to Black Friday sales — and more vaporous reports of progress in Europe.
Come on, people. Sure it’s OK to reassure your sister-in-law that her child is well-behaved — even when the little bugger consistently ruins Christmas dinner. Sure it’s OK to smile and say thank you for the gift of a James Patterson novel you will never read. But it’s not OK to lie to yourself and to others about how fine and dandy the economy is.
I know we all want to be cheerful this December, but let’s not be naive.
Corporations are still hoarding cash. Let’s just assume for a moment that I’m way out of touch and that this holiday sales surge is indeed enriching the coffers of American corporations and that the consumer spending is sustainable. Unfortunately, the last two years have proven that it’s going to take more than just a few nice headlines to get companies to stop hoarding cash and actually start investing in their businesses and hiring new workers.
According to data compiled by Thomson Reuters Eikon, capital expenditures by companies on the Standard & Poor’s 500-stock index are expected to total $546 billion in 2011, down from $560 billion in 2008. Publicly traded companies are buying back their own stock or making big buyouts of other companies — but they’re not reinvesting their profits in the American workforce or the broader economy.
You can probably argue that the 2011 holiday season will be the inciting incident that will cause corporations to change their ways… but to that I say, “Bah, humbug!”