Why Christmas shopping hurts the economy
The fact is, the best way to stimulate the economy would be to NOT give gifts at all. I guess it really is the thought that counts.
As we watch retailers slash prices and shoppers make a mad dash for their last-minute gifts, there is sure to be an endless stream of commentary on Wall Street about holiday sales. Economists are convinced that Grandma's spending on ugly sweaters this December will accurately measure how strong the American economy is right now and forecast growth in the New Year.
Well, not to be a Grinch, but I have news for you. Contrary to all the buzz in the media, Christmas shopping doesn't matter. In fact, I'll show you why being a Scrooge at Christmas is actually good for the economy.
I know this is hard to believe. Many people want to believe Santa has a very special accountant elf who delivers economic prosperity to investors every time an American swipes his or her charge card at the mall. But making holiday sales a major economic indicator doesn't make sense for a number of reasons. Here are the facts.
Fact #1 -- Spending less on Christmas is good for the economy.
I know, I just got on Santa's "naughty" list with this one, but it's true. Consider that December gifts accounted for $66 billion last year. That sounds like a lot of money, but it's only 0.5% of GDP. In fact, according to a fascinating new book called Scroogenomics, spending in malls for Christmas gifts is the least efficient form of spending we engage in each year. The author, a talented professor at the prestigious Wharton School of Finance, examined the $66 billion spent on Christmas gifts and found $12 billion "less satisfied" than if we had spent that money on ourselves. This only makes sense. People know what they want more than gift buyers do. The recipient would not buy that item, would pay less for it or find a more perfect fit.
Inefficient Christmas-gift buying does not help the economy because it causes waste and added logistical headaches for businesses such as huge returns. Even gift card sales, which are growing by about 25% each year, don't fix the problem. You get no savings from such cards, and you often get less than face value since many gift cards are never redeemed in full or are lost before the recipient can even use them. Again, not to be a Scrooge, but it really would be better for businesses and consumers alike to just stop giving gifts and start spending on themselves instead.
Fact #2 -- Consumer spending accounts for only 35% of GDP.
I know you hear a lot of "experts" saying that the American consumer fuels 70% of GDP growth. But this isn't true. While it's true that "personal consumption expenditures" (PCE) account for 70% of final demand, this measure ignores all the intermediate stages of production. A $300 dining room table, for instance, involves several steps before it gets scanned at checkout -- from logging, to timber refining to manufacturing to transportation from the warehouse. That stuff doesn't happen for free, but only the $300 consumer purchase is counted. Ignoring all the other costs along the way is a poor way to gauge the true economy. Similarly, fretting over the dollar amount for holiday shopping and ignoring everything else is a very shortsighted move.
Fact #3 -- "Consumer Confidence" is misleading.
Statistics in general are slippery things, but statistics tied to psychology are even harder to pin down and quantify. That's why reports about the consumer's level of confidence tend to fall all over the map -- up one month, down dramatically the next. However, these attitudes never really reflect real consumer demand. The Consumer Confidence Index asks only six questions: Two cover our generic views ("are business conditions good, bad or normal?"), two cover our ideas about job prospects and two ask about making big purchases like cars or a trip to Europe. In my option, this index should be called the Outlook for Business, Employment, Durable Goods and Vacation Plans, not a generic "consumer confidence" index.
Fact #4 -- Seasonal market forces aren't tied to holidays.
My own research shows that the second half of December beats the first half most years, and I don't dispute the strength of the market right now. But while Wall Street is starting its "Santa Claus rally" very soon, it has nothing to do with Christmas sales and everything to do with tax planning. We tend to procrastinate, and there is a lot of volume and trading going on as people close out the calendar year. Similarly, the spike in volume over the holidays and into January is due to year-end pension funding and has nothing to do with any warm fuzzies over the December festivities.
I know many of you think I'm a Grinch just dismissing holiday sales, so I will state for the record that I buy presents for my friends and family every year. However, I'm not naïve enough to think that I'm doing the economy a service with each package I place under the tree. The fact is, the best way to stimulate the economy would be to not give gifts at all.
I guess it really is the thought that counts.
Copyright © 2014 Microsoft. All rights reserved.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.