Monday, December 21

Does Christmas shopping hurt the economy?

Louis Navellier, over at MSN Money Top Stocks, seems to believe so.

Personally, I think he fails to make the case that Christmas shopping hurts the economy. The only point at which he comes close is when he refers to the problem of lost or unused gift cards. This is an accounting thing, which he doesn't explain particularly well. If you care, skip to the end of this post for an explanation.***

So, okay, Navellier goes for a slightly sensational headline to get our attention. Most of us have done it. I was still thrilled to read this post because finally someone is saying what I've wondered all along. Namely: How can rampant, reckless spending for a short period of time help the economy in the long-haul?

The short answer is that it can't.

Even in this recession, you can bet that plenty of people are going at least a bit (further) into debt to get their loved ones presents. Whether the recipients love or hate the gifts, the point is that spending comes to an annual screeching halt in January. People are experiencing the sticker shock from the latest credit card bills, and they cut back like crazy trying to get back to a solid financial base.

So I hope you can understand my confusion about how this helps the economy. Profits fly high -- though, in recent years, never quite as high as companies hope -- and then everything comes crashing down. Feast, then famine.

It's just another instance where the market folks and economists are being short-sighted. Yeah, the economy is helped out, briefly. But it's a blip. So we're told that the economy is swinging up, which gets hopes up.

Then, consumers get the bill for that upswing. And spending goes to what I'm guessing is an annual low. That makes the economy flag again. Which means that we hear reports of how badly the economy is doing, how the recession is still hitting people.

If anything, that's going to panic people and make them spend even less. Thereby furthering the dire news from business analysts that profits are down down down. And we all know how people react to that sort of news: They get worried and don't spend as much.

So, maybe Nevellier is right. Maybe this annual cycle actually does hurt the economy.

But, like the people whose arguments he is rebutting, Nevellier is focusing too much on the short-term. First of all, there are plenty of people who are staying sane during the holiday spending season. Unfortunately, it's a vast minority; but it is a percentage of the population. (Though never as big of a percentage as the polls indicate.)

There's also a slow, but natural, stopping point to this panic-induced spiral. After a month or two of cutting down on everything, the consumer gets restless. The bills get back to pre-holiday levels, and a few small luxuries get added back to the budget. Spending slowly resumes.

But that holiday rally the market analysts depend on, well... That's another year away.

***Basically, any prepayment (money given before goods/services are rendered) is categorized as "unearned income" rather than actual income. That means that, until the gift card is redeemed, the money can't count toward profit and, in fact, counts as a liability. (I'm guessing that's because the buyer might request the money back at any point.)

Since businesses pretty much sell themselves (aka their stock) based on having good profits and low liabilities, this can be a big problem, especially when you consider just how many gift cards are bought during the holidays.

Now consider how many are lost or not used in full. It's a problem for the company's books. It's also, as far as I can tell, the main reason companies start to charge you for unused gift cards after the first year: It's really the only way they have to officially count the money they have received.


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