Seasonal Shoppers

Story Highlights:

• Retailers expect holiday sales to be subdued compared to last year because of economic troubles—worrisome because consumer spending is a major driver of GDP growth.
• In our view, the pullback in consumer activity is only natural considering the jolting effects of the financial panic. It's evidence of cash hoarding due to fear.
• There are reasons to believe the economy will get worse, though it likely won't be as bad as widely feared. Already, the economy is benefiting from recent monetary stimulus and more help appears to be on the way.

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Spending and the holidays go hand in hand. Retailers look forward to the holiday season as much as we look forward to those wrapped presents under the tree—that is, with great eagerness and glee. After all, Black Friday is the day most retailers turn a profit for the year.

This season, despite stronger-than-expected Black Friday weekend traffic, consumer spending to be subdued by economic troubles. If so, that could put a damper on the holiday spirit for everyone—personal consumption is the largest component of GDP. There are widespread fears will remain weak if not fall further in the coming months. There's little doubt we're in for a material recession in the period ahead. The only remaining question is how deep it'll be.

But there's another side to the story. fell 1.1% in October—off already very low levels. This is an underappreciated positive. Many past recessions have endured because producers had to work through big excess inventories before they could rebound. But this time around is a bit different than the norm because inventories are already very low. It's possible this could curtail some of the downturn in the period ahead, though it's too early to say.

In our view, the pullback in consumer activity is only natural considering the jolting effects of the financial panic. It's evidence of cash hoarding due to fear. (Other evidence includes the recent auctioning of one-month Treasury bills at a .) It's uncertain if this jolting effect will endure or if it will be relatively short-lived. To be sure, a material recession is likely in the fore, but there is more good news than it seems.

The Federal Reserve has consistently indicated a willingness to act aggressively to stabilize and bolster the economy through the crisis. Monetary stimulus takes time (as in quarters and possibly years) to have a tangible effect, and though sometimes it's administered well and other times not as well, in the end there will be some real economic result no matter how many mistakes are made. Already, there are signs the, despite a few missteps along the way.

In addition, consumers could soon benefit from three indirect sources of relief: lower mortgage rates, lower energy costs, and tax relief in the form of new stimulus packages. This relief could amount to hundreds of billions of freed dollars for consumers in 2009 and would have an effect long before most government action could.

Still, we caution those who are hoping new stimulus packages will solve economic problems. Stimulus in the form of temporary handouts (like the rebate checks earlier this year) doesn't change consumer behavior. The most recent stimulus saw a spike in consumer spending that lasted exactly one month, then the normal rate of growth resumed. Consumers act accordingly if they know a stimulus is temporary. Those serious about longer-term benefits to the economy via handouts will put a more permanent consumer stimulus—like a permanent tax cut—on their wish lists instead.