(If this belongs in GD, okay, but I think there might be an objective answer that some economics person might teach me.)
I’ve been hearing on the radio, and I just found an article from the Associated Press which says:
I can’t argue with the numbers. If they say that this year had the lowest numbers in several years, I beleive them. But it seems to me that a 2.7% decline is not a disaster; it only seems to be a disaster because people have gotten used to (or addicted to) an uninterrupted string of increases.
I’ve had to take salary decreases in the past. While a 2.7% decrease is bad news, it’s not nearly as bad as a 5% or 10% or 40% cut. So why are people talking like this is the end of the world?
(I anticipate that some people will remind me that 2.7 is merely an overall average, and that some portions of the market have done far worse than others. I concede that point, provided that we all recognize that in order to reach that 2.7 average, other parts of the market have done very well - better than ever, in fact. So what’s the big deal if the average is not even 3% bit off from last year?)
Last time I checked, consumer spending accounted for two thirds of the US economy. Retail sales may be a hefty chunk of that amount so even an “insignificant” 2.7 percent drop in one month has an impact upon the larger US economy. It’s the flow on effect that causes the damage. Lower retail sales means retailers will not carry seasonal employees longer, nor convert as many into part- or full-time employees. That means more people unemployed who won’t be buying much more than necessities, etc. Fewer sales means stores cut cost by closing stores. In turn, those who service those stores (utility workers, maintenance workers, etc.) may lose their jobs. And so on.
And a 2.7 percent drop in one month, coupled with a 2.1 percent drop in November (4.8 percent overall for two months) wipes out the entire yearly gain from 2007.
In a House of Cards economic system, it doesn’t take much for one sector to have a significant impact across the boards, even if the actual numbers may not appear to mount to much.
FWIW, I don’t believe we are in an economic recession within an overall functioning economic system (boom and bust, growth and recession, that sort of thing). I think we are seeing a fundamental fracturing of the entire economic system, coupled with increasing failure of our political system. But that’s for GD and not GQ.
Don’t forget that that small drop came on the heels of significant price reductions. Essentially, they had their post-Christmas sales pre. So I would imagine that the loss of profits was much heavier than the loss of sales would indicate. And they will order less spring merchandise, so manufacture will decline (although that might largely affect China), people will get laid off,… It is a positive feedback loop, unless nipped in the bud.
I see it not as a fracturing failure, but as a correction. People were stupid to think that things could keep increasing forever. They ought to be able to handle an occasional 10% up or 10% down, instead of relying and expecting every year to be significantly better than last year.
Sales in November were $355.7 billion and that dropped to $343.2 billion in December. So we’re talking about a difference of $12,500,000,000.00
This source estimates that an adult with a bachelor’s degree can, on average, expect to earn about $2.1 M over the course of their lives. So we are talking about more money than nearly 6000 people will earn in their entire lives, lost in one month.
(the last link is a picture of an estimated 6000 people to give an idea of just how many people that really is)
Okay, let’s put it this way: If sales had gone up by 2.7%, would people be delirious with joy? No, they’d be saying, “Damn! I was hoping for 4% or even 5%!” Isn’t this expectation unrealistic?
(Anyone know where I can find out what the actual figures for recents years were?)
There are a number of things to think of that act as multipliers on what might otherwise seem a small drop. Each of these things is independently important and you’ll also see how there’s an interconnection.
First, look at macroeconomics and the general economy, there is a principle in economics call the GDP multiplier (if memory serves). The basic idea is that 1 spent at a toy store generated .95 spent to suppliers and employees, who spend .90 for their expenses, which generates .80… and so on. I don’t know the multiplier for the current market, but a 10x multiplier is not uncommon. In other words, a 2.7% drop in sales might mean 27% lower total economic spending due to the retail industry.
It’s a little like how the direct loss of 500,000 jobs in Detroit might mean 2.5 million jobs total. If spending of all types did that poorly, we’d have real reason to panic.
Now, let’s look at it in a microeconomics sense focusing on one business:
many retail stores do about 50% of their business from November to December. Thus, 2.7% during the holiday season is a big percentage off for the entire year.
owners depend on profits, not sales. Let’s say you run a toy store and in a normal year, you do $100,000 in sales, with costs of $95,000. A 2.7% drop in sales means that the company does $97,300 in sales with costs of $95,000. That doesn’t look so bad, but it means the compensation for the owner has gone from $5,000 to $2,300, or a 54% pay cut.
remember that most owners are shareholders in the stock market. You hold stock in a toy store because you think it will make more money for you than another investment. If the toy store used to give you 5% returns based on their net income, but is only giving 2.3% now, you’ll be tempted to sell it and buy a CD or a bond at 3.5% or more. Thus, a small change in profits can have a significant change on stock value.
stock is often used as collateral for loans. So maybe the toy store can afford to lose $2,300 - but, with its collateral no longer sufficient, the bank called in its note and forced it into bankruptcy. That’s a slightly exaggerated worst-case scenario, but Enron died when it did largely because a reduction in its stock price caused banks to call big loans due immediately.
dracoi, everything you wrote makes perfect sense. Except that it would all apply to increases as well. But people treat a 2.7% downturn (and all the accompanying effects that you listed) as a disaster, and I believe that the very same people would treat a 2.7% upswing (and all the accompanying positive effects that you could have listed) as ordinary.
Rigamarole’s link about Loss Aversion answers my question very well, and I publicly thank you. “… completely irrational … cognitive dissonance …” :eek:
Remember the population of the US is increasing. If the average person’s spending stays exactly the same the aggregate will still rise. Also, consider the time value of money. As deflation is rare, nominal dollars spent needs to increase to stay flat in terms of real dollars. I don’t know if the sales figures are adjusted to reflect this.
And the point that sales fell despite widespread discounting is a big one as retailer profits will be way down as a result. Expect lots of stores to go belly up as a result of the lower sales.
I think I kinda whooshed you, but Musicat’s post highlights my point, which is that the way the media and journalists analyze that type of information (a 2.7% decline in retail sales) can influence how we feel about it. To say that sales “plummeted” makes for a very doom-and-gloom outlook on the economy. It makes it sound like the floor is collapsing under our entire society.
I think another factor to consider is the fact that while 2.7% of any given item, or store, etc is not that big of a deal, a 2.7% drop in aggregate is really shocking. The more numbers you have in a set, the more resistant a set is to fluctuation, so any kind of fluctuation represents a very large shift.
For example: the birthrate in your household dropping 10% in a decade is not surprising. In your block, still within normal statistical fluctuations. Your city, more indicative of a trend. Your country? Something weird is up. The globe? Definitely something out of the norm happening.
Another example: According to this article http://http://www.guardian.co.uk/environment/2008/aug/06/climatechange.scienceofclimatechange, scientists are worried that the global climate could increase by 4 degrees Celsius, and they were hoping for only a 2 degree increase from pre-industrial times. So basically that’s 2 degrees that everyone is freaking out about. If the average temperature in your town, or in your state, goes up 2 degrees for a year, probably not a huge deal. But over the globe? That signals a drastic problem.
In addtion to what dracoi said, let’s consider some other factors.
Inflation that 2.7% decline in sales doesn’t account for the increased cost the retailers had to pay for the same stock. According to the Bureau of Labor Statistics, costs in the retail sector have risen by 9.5% since 2005 – a little more than 3% per year. So sales would have had to increase by 3% just to keep returns even, adjusted for inflation.
Furthermore, prices for clothing (a major part of December sales) were basically unchanged from December 2007, which meant that retailers were absorbing their cost increases. Still, they couldn’t maintain sales.
Also, retail sales are typically higher in November and December than in other months. Electronics stores typically make more than 14% of their annual sales in December, national chain department stores almost 16%, jewelery stores, more than 22%, etc. So a drop in December sales has a much more significant impact to a retailer’s bottom line than, say a drop in January (the worst month for retailers.)
Finally, December wasn’t an isolated case. Retail sales declined compared to 2007 for six consecutive months, including December. That means retailers had been falling behind every month.
Taking it all together, retailers were hoping for a big increase in December sales to counter problems from earlier in the year. Not only did they not get it, but things got worse.
