The Breakdown

Explaining Southern California's economy

Why Black Friday can't save us from the fiscal cliff

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28418 full

Now that Black Friday 2012 is in the history books, we can all start arguing over whether it lived up to the hype. Forbes' Tom Van Riper cites a Deutsche Bank analyst who says that the results were basically flat compared with last year. CBS News sees it a little differently.

Regardless of how the big day ultimately works out, there are some inevtiable questions — given our continued sluggish recovery from the Great Recession — about whether the consumer can somehow rescue the economy. That could be too much to ask of the retail sector, which makes up less than 10 percent of U.S. GDP, as I noted on "AirTalk" ahead of Black Friday and its more recent offspring, Black Thursday. 

Others disagree. Last week, the L.A. Times ran a macro/microeconomics-mash-up-story about the Black Friday shopping frenzy and what it might mean for the overall economy, beyond the bottom line of retailers. Here are the critical paragraphs:

Consumer spending accounts for about 70% of economic activity, and the holiday season constitutes as much as 40% of annual retail sales.

[...]

Their willingness to spend has been bolstered by improvement in the job and housing markets. Retail activity helped the economy muster a 2% annual growth rate in the third quarter. That's far from exuberant, but it would have been worse otherwise, experts say.

And with corporate executives fixated on the "fiscal cliff" drama over potential tax hikes and spending cuts, a robust holiday shopping season could provide a crucial economic counterbalance.

This assertion is a little hard to understand. The Congressional Budget Office calculates that if the U.S. goes completely off the fiscal cliff, it will cost $671 billion. Meanwhile, the Times cites a National Retail Federation number that says a robust holiday shopping season could be worth $586 billion.

The underlying argument here is that with a deadlocked Congress unwilling to provide a fiscal solution to the economy's woes (at least in the lead-up to the election), and with the Federal Reserve getting limited bang out of keeping interest rates near zero and flooding the economy with money, it's the consumer who will somehow find the resources to keep the economy expanding at its current (rather woeful) two-percent rate.

The Times quotes economist Brian Wesbury, who's been pretty bullish on the recovery despite its ups and downs. His 2009 book, "It's Not As Bad as Young Think: Why Capitalism Trumps Fear and the Economy Will Thrive," set a high standard for optimstic prognosticating about what several years ago seemed like a competely anemic bounce-back from the financial crisis. I've seen Wesbury in action — he's an economist whose quotability makes him a nearly ideal guest on CNBC, as well as the kind of speaker who thrives at business-oriented conferences. That's no knock: he's worth taking seriously, even if he falls into the ocassional trap of thinking that capitalism will always and everywhere quickly correct its faults.

As far as what he told the Times, he might be on to something: Americans have been saving less, with personal savings falling from 4.1 percent in July to close to 3 percent in September, according to the Federal Reserve. And last week, Wesbury and his colleagues at First Trust Advisors blogged about how the fiscal cliff isn't necessarily that big a deal.

But even if Black Friday and the rest of the holiday shopping quarter don't live up to expectations, it's clear there was substantial consumer activity. It's wasn't a choice between $586 million and zero. The difference between going over the fiscal cliff and avoiding that fate is more stark — and the consequences would be considerably more damaging. A Vanguard economist reckons the hit to U.S. GDP would be on the order of 4 percent. With the economy expanding at 2 percent, you can see what that gets you.

Recession. 

So while a solid holiday shopping season would be great and we'll certainly take it, it doesn't stand much chance of truly counterbalancing the fiscal cliff. 

Follow Matthew DeBord and the DeBord Report on Twitter. And ask Matt questions at Quora.

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