Why holiday sales are actually very bad

Bargain-shopping will never save us, and spending isn't as strong as some would believe.

By InvestorPlace Nov 30, 2011 1:46PM

Image: Santa Claus (© Corbis)By Jeff Reeves, InvestorPlace.com


A lot of hay has been made lately about the return of American consumers and the resurgence of retail. Yes, holiday sales got off to a bang as shoppers spent a record $52.4 billion over the Black Friday weekend -- up 16.4% 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 five reasons to doubt that the rosy headlines from the beginning of the holiday shopping season will last:


Bargains spur sales but not profits or jobs

It's great that holiday promotions allow 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 (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 (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, with or without the nice check from Uncle Sam. How, then, did incentives help the auto industry?


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 and 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 (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 (ANF) and Gap (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 waitstaff, or bought locally grown produce and meat to cook the 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" failed 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. Ye,t the stock market rallied on Monday with the Dow up over 300 points just because of 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 large acquisitions 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!"



Jeff Reeves is the editor of InvestorPlace.com. Write him at editor@investorplace.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.





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10Comments
Nov 30, 2011 2:59PM
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Jeff Reeves make it sound as though buying a TV or clothes does nothing for the U.S. economy.  TV's haven't been made in the U.S. for over 30 years, GAP has been peddling foreign clothes for almost 40.   Nothing has changed recently in terms of U.S. manufacturing, and the economy has had many bright spots over the last 30-40 years.  Trying to convince consumers that spending money on foreign-produced goods isn't good for the economy is counter-productive.

Regardless of where you buy your TV it IS good for the economy, when you buy a TV you are supporting longshoreman, port staff, American shipbuilders, railway operators, American made trains, Warehouse staff, American reps, Truck drivers, American Truck Manufacturers, retail employees and all other behind the scenes Americans who support the supply chain logistics.

Nov 30, 2011 3:46PM
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We have sold our sole to China - Wal-Mart is just the final step for China to sell their products.  We now have child labor at its peak, lead paint (banned in the U.S. in the 60's), pollution galore from china manufacturing, with the China government the real winner.

 

Yes-things are cheap now, but the quality of many products SUCK.  You can even purchase an AMERICAN FLAG, made -in CHINA!!!

 

NAFTA-hurt the United States and helped all of the other THIRD WORLD countries.  American companies can not compete with no child labor laws, OSHA, lead paint, tariffs of 17% on our products but NO TARIFFS on products from China.

 

WAKE UP AMERICA- you have been sold down the road by our own government.

 

Think China gives a CRAP about the so called GLOBAL WARMING - they are building new coal fired plant at the rate of 1 every 6 weeks!

 

Our unemployment rate #'s will start to look better next year as the long term unemployed (like myself at 61) exhaust our benefits and fall off the chart.  I was in banking for 36 years and it is a crooked business now by and large.  If you are honest and really want to help people, (this means advising people not to borrow money sometimes), with good sound advice - but banks will not tolerate people like me!  SELL, SELL, SELL -make your manager a star this year - next year the loans will go bad and the bank can write it off.

 

Last week 245 foreclosure notices in the Knoxville News Sentinel.

 

Even with 9% + unemployment - we will see CEO's rake in MILLION $ Bonuses this year.  I am so proud of their great hard work to help destroy our country.  The Pensions that once went to the rank and file now goes to CEO's as bonuses, stock grants etc.

 

I am not being negative - but a REALIST!!!

Nov 30, 2011 3:25PM
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Another thing is that Americans are working very hard to repair balance sheets.

 

Which will be the key to restructure in the long term. The world is going to have to work to get debt down. Including governments.

 

But what I find interesting is just the all out focus of traders on debt given historically, it's actually pretty low globally, and even low historically in the developed economies. People throw that "unsustainable" word around for a hot buzz.

 

It's manageable is the bottom line. To an extent some analysts are correct in that the political willpower to contain these problems is absent. No one wants to lose elections and the public won't like tax raises and falling government benefits.

 

I just happen to think that many people are starting to see because of the length of this recession, the lack of available credit, etc. And get their act together. And in turn, that will force the gov to do the same.

 

From the top down, we've all accepted to few taxes, rebates, credits, and taken advantage of whatever government benefits we can find. And while the group really getting the most benefit comes from the top, we've all participated.

 

Which is why we all have to participate and sacrifice.

Nov 30, 2011 4:25PM
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Any improvement is better than no improvement. 
Nov 30, 2011 3:17PM
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A lot of hay has been made lately about the return of the American consumer and the resurgence of retail. 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.

I don't think that's what *anyones* real reaction was. Who is out there writing articles that say Holiday sales have saved our long term problems?

 

And it's even less likely the majority of people have an opinion remotely close to that. We all live in the real world, we don't think better holiday sales have pushed unemployment down.

Take the $1 billion data center in North Carolina that created a mere 50 full-time jobs!

All your points were oversimplifications of people spending money in the US and what it means for economies.


Yes, a lot of our purchasing is not going to only drive jobs for Americans, or a phenomenal level of hiring. But as above, you've over simplified.

 

While that data center might only be employing 50 full time workers, how many contract and support staff help keep it running? It had to be built, so that was construction jobs, it has to be maintained, and that's other jobs, etc, etc.

 

You have what seems to be an almost absolute position that any new spending by consumers or employers doesn't help anything. Almost like saying, "they might as well not even do it"

 

????

 

I think that's a step away from what should be happening. If you could get any further in the opposite direction. That seems to be what you're saying.

Irrational exuberance is creeping in

From where?

 

This year has been negative since March and that hasn't changed. Starting back with the Japan Earthquake and then the Arab Spring and then the Europe Crisis.

 

Not even in the investment world are they being exuberant. If you look at the Cash on Balance against stock, 10% of the Market value is in *COLD HARD CASH* an *ALL-TIME* High. And also cash flow is at an all time high as well.

 

You can tell restraint is in place because if it wasn't, stocks would be trading at much, much higher multiples. All else equal, the market would look like 1999, but because there are all these issues, it's severely subdued at present.

Ye,t the stock market rallied on Monday with the Dow up over 300 points just because of Black Friday sales -- and more vaporous reports of progress in Europe.

Simplistic.

 

The market rallied because people were covering positions from shorts on terrible slide the preceding week and also It was due to bounce back and sometimes that is just what happens. It's almost self-fulfilling sometimes. The market doing what it does.

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.

The US economy has been surprisingly resiliant both at the Corporate level and even the mainstreet level given all the headwinds. So I maintain the idea that the current economic circumstances are "OK"

 

You also have to look at the fact that the US has been taking steps since last year to de-couple from Europe. The government, corporations, and most important banks. US banks are only holding something like 600 billion in what could be toxic debt, which they've been selling off. And they are also much better capitalized today than 2008. Meaning they can take the loss without diluting the stock.

 

It's really nothing compared to what was held in the mortgage crisis.

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!"
I don't think people think that. Apparently only you do.
Dec 1, 2011 7:59AM
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Finally a columnist  who "gets it". I witnessed Black Friday first hand and my take-away was folks were shopping for "the deals" because they were strapped financially. They weren't celebrating because all was well with the world. They were simply trying to cope in a down economy by buying cheap goods and have a nice Holiday. Let's see if sales "fall off the table" when the "deals" are over. The next question then ....is when do the retailers start discounting to clear inventory when the big recovery fizzles?
Nov 30, 2011 10:53PM
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Can we please just enjoy some good news without having someone bringing up what's wrong with the economy. I feel that half the problems we have are self induced and that we are constantly hearing how bad things. You know, if you hear nothing but bad news over and over you either believe it or stop listening. I know that the country is not in great shape and the economy is not exactly great but believe me it could be worse.

And about the Wal-Mart comment, you really need to understand what you are talking about before you open your mouth. The reason we buy so much overseas merchandise is because the US has priced itself out of the market when it comes to labor. We all have the choice to buy american products but it seems the majority of our people choose not to because of many reasons, the biggest being price. for explanation see "The Auto Industry". We must remain competitive in the world labor market because the only reason companies go overseas is to add to the bottom line and the last time i checked that's the responsibility of a company to its workers and share holders.

NAFTA is not the problem, it is unskilled workers wanting skilled pay. No one wants to start at the bottom and move up. Too tough i guess

Nov 30, 2011 5:15PM
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Most of the things said in this article are true and I agree with. I especially like the advice of buying locally.

 

However, just because Apple products and the like are manufactured overseas does not mean that Americans do not profit from their import and sales. Someone has to work at Best Buy (where iPads are sold) and products aren't teleported (yet) into the stores. No, it's it doesn't have the same affect as products being manufactored in the US, but let's not pretend that we don't benefit at all from the imported products.

Nov 30, 2011 2:29PM
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Bad logic and a sensationalist headline. The negatives the author points out do exist, but are pretty much unrelated to a comparison of the VOLUME of holiday sales from this year to last. The headline makes it sound like the sales numbers are somehow false. 

Feel free to complain about the many economic issues, but please don't start tying random topics together and yelling FIRE.
Nov 30, 2011 11:44PM
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SmileHi, I bet the person who wrote this article  complains about Sunshine!
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