Once upon a time, there was a story about Christmas, and it went something like this:
Every November, when millions of Americans had barely frozen their Thanksgiving leftovers, they would scramble into local shops and shell out full price for several stockings' worth of gifts. This consumer riot (at least in good years) encouraged merchants to order tons of stuff to refill their shelves. And these orders enabled factories to load up on employees and raw materials.
Thus, the U.S. economy, with a strong measure of Christmas cheer, would purr ahead for another year. So went the time-honored tale.
Only--at the risk of committing a holiday-season blasphemy--it is not entirely true. While it may sound Scrooge-like to say so, Christmas is overrated as a key to understanding the economy.
Normally, a strong Christmas season no more heralds a new year of prosperity than a lackluster season augurs hard times. "You might just as well flip a coin," said Ron Duritsch, a retail analyst with Management Horizons in Columbus, Ohio, who has looked for a connection between holiday buying and future economic growth. "Christmas is not good enough (statistically) to use as a reliable forecast."
Not that Christmas isn't important. A great many retailers, including purveyors of toys, clothing, jewelry, specialty items, consumer electronics and many other products, rely heavily on year-end business. Billions of dollars change hands. Strong or weak sales can make a huge difference to individual companies and send ripples through the whole economy. This year, the Christmas season has special significance because executives are anxious to gauge the aftereffects of October's stock market crash.
Consumers' willingness to keep spending is seen as crucial to avoid a recession, and the spirit they show in holiday shopping will be a valuable barometer of their attitude. In addition, Christmas remains an important symbol of the economy's vitality, one that affects a gamut of post-holiday spending decisions in ways that are hard to measure.
Nonetheless, the financial well-being of Americans is the result of many segments of the economy, including housing construction, business expansion and the global competitiveness of U.S. products, ranging from aircraft engines to zinc-coated steel. The behavior of consumers in November and December, while obviously significant, is just one of these factors.
"It normally wouldn't have this kind of importance," maintained James E. Newton, chief economist of Meretrends, another Columbus, Ohio, consulting firm. "If retailers expect to have a poor Christmas season, they plan for it, and the net effect the following year is nonexistent."
The way in which merchants now plan for it is one of the reasons that the Christmas season's importance is sometimes misunderstood. Simply, they have found a way to take some of the gamble out of the holiday season. The strategy: pre-Christmas sales.
With the exception of a few items used as bait, stores used to be extremely reluctant to put holiday goods on sale before Christmas. The rationale was simple. The bigger the markdown, the punier the profit. Unsold items were unloaded in frenetic sales--after the holiday.
A New Game
But now, when retailers worry about the mood of consumers, they do not wait to slash prices, as a stroll through any mall right now will illustrate. What this means is that shopkeepers limit the damage of a dismal season by continuing to sell their merchandise. It also means, however, that profits are pared.
In fact, the traditional view of Christmas as a time when people pay premium rates for goods is being replaced by a new game of chicken between consumers and retailers, with shoppers holding off purchases in the hope that prices will plummet at the last minute. As a result, some experts scold retail executives for these changes in selling strategies.
"From my point of view, it's really dumb," said Ben M. Enis, a marketing professor at USC's graduate business school. "Retailers put so much effort into marking things down that people don't really pay a lot of attention to the regular prices anymore. If something isn't on sale, people wait."
Typically, the products they are waiting for were ordered months earlier from manufacturers. In other words, the factories may have made their Christmas profits the previous summer, depending on their arrangements with the stores. "By the time you're into the heart of the Christmas season, the majority of our shipping to retailers has already taken place," said Loren H. Hildebrand, an executive vice president with Mattel Inc., the toy maker.
Christmas remains crucially important to the toy industry. Of last year's $12.5 billion in retail sales, 60% took place in the last few months of the year, according to the Toy Manufacturers of America. While that is dramatic proof of Christmas's enduring importance, it is a smaller share than it used to be. The holiday represented more than 70% of toy sales as recently as a decade ago.
These days, the big toy makers are vigorously promoting toys for Easter--and grown-up toys, including stuffed animals, for Valentine's Day. As Hildebrand explained, the sale of a Barbie doll in March need not detract from toy sales in December.
"When you think about the fact that you can't move Christmas, they (toy makers) have really accomplished quite a shift," said Jodi Levin, a spokeswoman for the New York-based trade association.
Toys, of course, are not the only products helped by the holiday season. Various goods, including consumer electronics, furniture and some appliances, sell especially well at Christmastime. Various sorts of products tote up 30% or more of their sales in the final weeks of the year. Retail spending adds up to about a third of the whole economy--and of last year's $1.4 trillion in retail spending, just under $4 billion, or 27%, came in October, November and December.
But the fact remains that such year-end retail sales in and of themselves do not create prosperity or recessions.
Trouble Down the Road
According to Michael Penzer, a senior economist with the Bank of America, Christmas cannot be relied on to predict future economic activity because so many other big things can happen. "Consumer spending in November would have told you nothing about what OPEC would do to us in December," he said of the 1973 oil embargo by the Organization of Petroleum Exporting Countries that triggered massive inflation and disruptions that echoed through the world economy for years.
Ironically, a booming Christmas season once even led to trouble down the road. This happened in 1979, a year of double-digit inflation and one in which retailers were girding for a poor Christmas. Consumers, as they often do, defied the forecasters. Then, when the surprisingly strong sales triggered new factory orders, government officials reacted less with relief than with anxiety about inflation.
The next March, President Jimmy Carter imposed restraints on consumer credit to cool down the economy--a move that analysts say contributed to the next recession. "It turned out to be a very good Christmas season, and then the President imposed credit controls and scared everyone to death, and that made the next two Christmases turn out pretty lousy," recalled James F. Smith, chief economist with the Bureau of Business Research at the University of Texas in Austin.
Yet, if it is hard to find a reliable link between a strong Christmas and a strong economy, many point out that the season remains important as a symbol that influences all sorts of business and spending decisions. And the experts all agree that the season is particularly symbolic this year, in light of the stricken stock market. The view is that consumers will reveal whether they have become afraid to spend money, an attitude that could trigger a recession if it is deeply held.
Bernard Codner, director of the Institute of Retail Management at California State University, Los Angeles, described Christmas as the economy's "Dow Jones average," a bellwether that sets the tone even for industries that have nothing to do with gift items. "A lot of people look at department stores and major specialty stores as the litmus test for what is happening in all of retailing," Codner said. "If Christmas is strong, the message is that the economy is strong."
The message is often confusing in today's global economy, however. If Christmas sales should prompt Mattel to hire more factory workers or cut its staff, those affected live in the Philippines, Hong Kong, Taiwan, South Korea, Malaysia and other foreign countries. Similarly, much of the apparel now piled up on store shelves originates in Singapore and other places far from the United States. The same goes for video cassette recorders and other popular consumer items.
Thus, in a particularly odd paradox, a lackluster holiday season could bring an unexpected conclusion to the Christmas story of 1987:
If it means that Americans buy fewer imports, it could reduce the nation's troublesome trade deficit. Noted David Wyss, an economist with Data Resources Inc. in Lexington, Mass: "Not to exaggerate the point, but it (a weak Christmas) may cause the next recession to be in Japan rather than the United States."
THE CRUCIAL FOURTH QUARTER The following numbers represent the percentage of 1986 yearly retail sales that occurred during the fourth quarter, for designated categories.
TOTAL RETAIL SALES: 27.3%
TOTAL RETAIL SALES, EXCLUDING AUTOS: 28.2%
FURNITURE AND HOME FURNISHINGS: 28.1%
CONSUMER ELECTRONICS: 32.2%
HOME CENTERS: 25.5%
DEPARTMENT STORES: 33.8%
DRUG STORES: 28%
EATING AND DRINKING ESTABLISHMENTS: 25.6%
Source: U.S. Department of Commerce and Management Horizons, a retail consulting firm and division of Price Waterhouse, in Columbus, Ohio: