Will Holiday Spending Ruin First Quarter GDP?

The National Retail Federation predicts retail sales will rise 3.3% this holiday season. MasterCard SpendingPulse, a research operation, says that store activity has accelerated sharply in the last week. The NRF figure may turn out to be too low.

ComScore, the online research trends company, predicts e-commerce sales for the year-end retail season will be up 14%. It has also seen a pick up in sales in the last several days.

One issue that has not been explained yet is whether these improvements are due to sharp discounts. That would greatly harm the margins of retailers, but consumer spending would be higher nonetheless.

Te holiday activity may undermine GDP growth in the first quarter. Consumer spending is still over two-thirds of American GDP. One of the reasons the economic slowdown has lasted so long is that fear about employment and high leverage have kept people from buying anything but essentials. Consumers have also made more effort to save. What may have once been spent on a credit card now is applied to pay credit card balances down.

The consumer may have become overextended again.  They have no access to home equity loans because of the housing crisis. Banks are much more careful about extending credit than they once were. People are still losing jobs, and the economy barely creates new ones.

The hope that the economy has improved and pent-up demand due to very slow holiday sales in 2008 and 2009 may be pushing shoppers back into stores. They have not had much of a Christmas the last two years. It may be time to be more generous with gifts.

The problem with the surge in shopping activity is that credit cars balances are likely to balloon again. That means consumers will be expected to make significant payments in the first quarter of 2011. The last two years may have been ones in which the consumer “deleveraged”, but outstanding American household debt is still near historic highs.

The optimism about 2011 may be well-placed. New tax programs will allow people to keep more money than they expected. But, that cash may be used simply to pay off what people have accumulated to have a good holiday. If so, the economy will hit another rough patch after the first of the year.

Douglas A. McIntyre