Holiday Spending May Bode Well for Economy

As I've noted earlier, the economy's emerging as a top issue for election '08. While some news reports have noted significant concerns among workers, I'm not to gloomy about our prospects for 2008 (although the shakeout in the housing market is indeed troubling).

In any case, I always look to December retail sales as a fairly reliable (or at least interesting) bellwether for the coming year. As it turns out, this season's holiday sales are looking pretty good, as this Wall Street Journal article notes:

Early indications that Christmas sales have been decent - though not spectacular - suggest that Americans may be opening their wallets wider than consumer-confidence barometers have been signaling they would.

With the economy sending mixed signals, the issue of how well those barometers predict consumer behavior has taken on greater-than-usual significance this holiday season. Amid widespread concerns that a credit crunch will tip the nation into recession, economists have been poring over sentiment indicators and retail-sales data, looking for clues about consumer spending - by far the biggest contributor to the U.S. economy. (See related article.)

Their recent interest underscores a long-running debate about whether confidence numbers are useful in predicting how freely consumers will spend -- or anything at all. Indeed, while the surveys show confidence has plunged in recent months, a resurgence in spending during the final weekend of the holiday shopping season appears likely to bring a sigh of relief to many of the nation's retailers.

Data released Friday show why many economists have reservations about the surveys. At 8:30 a.m. in Washington, the Commerce Department reported that consumer spending rose in November at the fastest clip in 3½ years. Ninety minutes later, the Reuters/University of Michigan survey reported that consumer sentiment in December had fallen to a two-year low - and, excluding the aftermath of Hurricane Katrina, had hit its lowest level in more than 15 years.

The monthly survey by the Conference Board, a New York business-research group, has also suggested an upswing in pessimism. The group's index of consumer confidence sank in November by 7.9 points - its largest point change in two years - to a two-year low of 87.3. But it isn't clear what the low readings mean, other than that consumers are worried.

Although holiday sales estimates won't be available until today at the earliest, retail-industry observers who track seasonal sales were upbeat yesterday. "We had projected a 3.6% increase [in dollars spent] this holiday season, and we expect that number will be hit and, potentially, could go a little bit higher," said Bill Martin, co-founder of ShopperTrak RCT Corp.

The apparent resilience of consumer spending only adds to the growing skepticism about the usefulness of consumer surveys. Part of the problem is the age-old debate between causation and correlation.

Jeremy Piger, an assistant professor of economics at the University of Oregon who studied consumer sentiment while working at the Federal Reserve Bank of St. Louis, explained that early academic studies of consumer surveys found that there was a correlation between the level of consumer confidence and future economic activity.

But, he said, later studies "got more sophisticated." They took a close look at other economic data released each month to see whether the confidence surveys, in and of themselves, had any predictive power. "The answer has pretty uniformly been, 'No,'" he said. The consumer numbers reflected other developments, on jobs and prices, for example.

Note the conclusion:

A drop in consumer confidence was one of the first signs that the U.S. was headed for recession in 1990, but sentiment also sank after the stock market crashed in 1987, and there was no follow-on recession. More recently, confidence dropped in 2003, and again in 2005 after Hurricane Katrina hit the U.S. Gulf Coast. There weren't recessions following those declines.

Whether recent nose dives in confidence will translate into a recession remains to be seen, but one thing is clear: Apprehension alone doesn't mean consumers will stop spending.

Sounds good to me - to the mall!