Up Front

The Scouting Report Web Chat: Holiday Cheer and Recovery

Karen Dynan

The much-hyped holiday shopping season typically accounts for about 19 percent of each year’s retail sales, making it one of the most important times for some retailers. After last year’s slump in holiday retail sales, economists are watching consumer spending closely this year for signs of improvement.

Consumer splurges this month may be a good barometry for gauging economic recovery. Most analysts expect we will see better numbers this year than last, but they don’t foresee a blockbuster season. In fact, most believe that consumer spending will only begin to increase gradually early next year.

Karen Dynan, vice president and co-director of Economic Studies, participated in a live web chat about this year’s holiday shopping trends and what that means in terms of recovery. Politico’s Fred Barbash moderated the discussion.

The transcript of this chat follows.

12:28 Fred Barbash-Moderator: Welcome everyone.

Karen Dynan, Brookings vice president and co-director of Economic Studies, is here to tell us how consumer spending and economic recovery are looking this holiday season.

Welcome Karen. I hope you’re doing you’re part this season to stimulate the economy.

But…let’s get started.

12:29 Karen Dynan: Thanks Fred; it’s a pleasure to be here.

12:29 [Comment From Dave: ] I saw today that Ben Bernanke was voted Time Magazine’s “Person of the Year” for 2009. What do you think about that?

12:30 Karen Dynan: I think he’s a good choice. I agree with the critique that the Fed, like other regulators and most analysts, did not understand just how much risk households and financial institutions were taking on during the credit boom and that this contributed importantly to the subsequent crisis.

12:31 Karen Dynan: But we need to remember that, a year ago, global credit markets were threatening to seize up and, had that happened, we would have seen a much worse recession. I think that the unconventional steps taken by the Fed to support credit markets—under Bernanke’s leadership—were critical to avoiding this outcome.

12:31 [Comment From Fred: ] Now that Christmas is just a few days away, what have we learned about the strength of the holiday shopping season?

12:32 Karen Dynan: It’s a bit of a mixed bag. The retail sales numbers for November came in better than expected—spending in the “core” category (which excludes autos, building material, and gasoline) rose ½ percent. Yet, the anecdotal evidence from stores is lackluster, and there are lots of stories of consumers cutting back.

12:32 [Comment From Dave: ] Yeah, it’s interesting especially since he’s more of a “real person” than past Fed chairmen….

12:34 Karen Dynan: I agree. In full disclosure, I used to work at the Fed, both under Bernanke and before that under Greenspan. I thought the 60 Minutes piece on Bernanke really captured what a down-to-earth guy he is. Especially, the part about his small town roots.

12:34 [Comment From Mike: ] Where do you think consumer cutbacks are especially evident?


12:35 Karen Dynan: People are cutting back on non-essentials, like luxury goods and expensive vacations. That’s pretty typical when the economy is soft.

12:36 [Comment From Mark, Greenbelt, MD: ] When the whole economic crisis began, we kept hearing that it was the worst since the Great Depression. In your view, is that true? If it is, can we possibly be recovering this quickly?

12:38 Karen Dynan: Well, I know we have seen the largest percent decline in employment since the Great Depression. But, even at 10 percent, the current unemployment rate is much lower than what we saw in the 1930s. It’s more comparable to the peaks what we saw in the early 1980s. So, it’s still telling us that we are seeing a lot of suffering.

12:40 Karen Dynan: You are raising a good point about how the outlook for recovery right now compares with what we’ve seen historically. Since 1960, GDP growth in the first year of a recovery has averaged about 5 percent. Over the coming year, most people are expecting something like 3 percent. So, that’s what we mean when we say that the recovery is likely to be soft.

12:40 [Comment From Shawn: ] Is consumer spending really the key to getting us out of the recession? Are there more important factors?

12:41 Karen Dynan: Consumer spending is a big part of the economy, but it doesn’t typically “drive” economy recoveries; rather it usually picks up as income picks up. For that to happen, we need businesses to start hiring again. Which means that businesses need to become confident that the recovery is durable and that they need to have the access to credit they need to hire and increase their spending.

12:42 Karen Dynan: The government can play a role supporting income, too, through stimulus measures like tax rebates and providing money to states and localities so that they don’t have to cut as many jobs. But, such measures are really aimed at providing short-term relief, not at sustaining the economy over the long run.

12:43 [Comment From Anne: ] We’re talking about consumerism leading the way out of a recession. Isn’t that unusual? Wouldn’t it be more typical for industries like construction to lead the way?

12:44 Karen Dynan: This relates to what I was just saying. Consumer spending doesn’t typically lead the way out of a recession. More typically, housing construction and business investment pick up before the rest of the economy.

12:44 [Comment From Jim: ] What do you think are the prime factors in the way of strong recovery?

12:46 Karen Dynan: Consumer spending will be held back by weak income growth (largely a function of how soft labor markets are) and by the big hit that households have taken to their wealth because of declines in home prices and stock prices. Spending on housing is likely to be very weak because we still have considerable oversupply in that sector — the vacancy rate is very high among both single-family homes and apartments.

12:48 Karen Dynan: There’s a lot of excess capacity in the business sector right now as well — together with the weak outlook for sales and the difficulty that some firms are having accessing credit — this is likely to hold business investment down in the near future.

12:48 [Comment From Emily: ] I’ve heard a lot of interesting commentary on the economic value of Christmas presents, and that most people don’t value a gift as much as it’s actually worth. The “best” gift in an economic sense is supposedly cash. With so much uncertainty these days, do you think more people will give cash this Christmas? And, if they give cash, do you think they’d be apt to give more or less cash than the amount they would have spent on a gift?

12:50 Karen Dynan: You are bring up a really interesting question. It’s something that I covered in a piece I had in the Washington Post last month.

Gifts cards and cash may make a lot of sense in cases where you don’t know what the person wants and, yes, given the tight times I think that people may be more likely to go this way right now.

12:51 [Comment From Susan: ] Is the holiday shopping season overblown as a factor in the economy? I keep hearing that terms like “Black Friday” and “Cyber Monday” are really just marketing gimmicks and are not the make-or-break events they’re made out to be. Is it hype, or real?

12:52 Karen Dynan: Black Friday is an important shopping day, but it is only one day out of a holiday shopping season that last several weeks. It provides some signal about how good a season we are looking at, but it is fairly noisy indicator. Sales on Black Friday could overstate the strength of the longer season if people move a lot of their spending up to take advantage of Black Friday discounts in these tight times. Or, sales on Black Friday could understate it if people were waiting because they were uncertain about their jobs or their year-end bonuses.

12:53 [Comment From Lester: ] You said that housing construction typically leads the way out of recession. Since housing costs are what caused the economic crisis, is that why we’re seeing such a soft recovery?

12:55 Karen Dynan: Yes, conditions in housing markets are definitely part of it. As I said earlier, we are still facing a lot of oversupply in that sector. And, the declines in home prices have left many households in a weak financial situation. Furthermore, I think that one big downside risk to the economy is that the millions of homes now in the process of being foreclosed upon could hit the market and depress home prices further.

12:55 [Comment From Danielle: ] What does the unemployment picture look like? Is there really such a thing as a jobless recovery?

12:56 Karen Dynan: The unemployment picture is very weak. The “good news” a couple of weeks ago was that we didn’t see another big drop in employment in November. But, we need to remember that 8 million people have lost their jobs to this recession so far and it is likely to be along time before those jobs are regained. That’s a lot of suffering.

12:57 Karen Dynan: When people talk about jobless recoveries, they mean that it takes a couple of years after the economy hits bottom for hiring to really pick up. We saw that after the last two recessions. And, it’s a really possibility right now—many firms are likely to increase the hours of existing workers and also to try to get more out of their existing workers before they begin hiring vigorously.

12:57 [Comment From Jack: ] As an economist, what do you want for Christmas? (Perhaps a policy-oriented wish)

12:59 Karen Dynan: Well, let’s see. In the short run, of course, I’d like to see the recovery pick up speed so that the millions of families who have been impacted by the recession and are struggling to make ends meet get back to a normal situation more quickly.

1:01 Karen Dynan: But, in the long run, we need to get back to a more solid sustainable position in terms of both household saving and national saving. Household saving was extremely low before the recession hit; it has since risen, which is slowing the recovery, but higher saving, in the end, will leave families less vulnerable to hard times.

1:04 Karen Dynan: At the national level, we have been running massive budget deficits. That’s natural when the economy is slow because the government is raising spending and cutting taxes to support the economy. In addition, depressed business profits and household income are reducing tax revenue. But, over the longer run, high government debt will depress growth and, worse yet, if investors lose confidence in our ability to service that debt, they could stop putting money into our country.

1:04 [Comment From Suzie: ] What do you think about those Lexus Christmas ads? The cost of the bow on those cars is probably more than I can spend this holiday season!

1:06 Karen Dynan: Well, it’s okay if you want to splurge at holiday time, but I definitely recommend that people stay within their budgets In fact, bankruptcies tend to peak about 2-3 months after Christmas, when people are struggling to pay their bills. Filing for bankruptcy can be very detrimental to your ability to get credit in the future.

1:07 [Comment From Rachel: ] I keep hearing conflicting reports – that the economy is strengthening, that were still in for a “w-shaped” recession, that the housing market is better, that it’s worse. Is there any consensus emerging among economists?

1:08 Karen Dynan: I think that some of the confusion relates to what it means when we say the recession is over. It means that the economy has hit bottom, but it doesn’t mean that we are back to normal. Millions of jobs having been lost to this recession, so there will be a big uphill climb back to full employment. And, the consensus among economists is that the recovery is going to be relatively slow, so it will be a long time before the incomes of many families are restored.

1:09 [Comment From Suzie: ] Is this a good time for economists? Do you find it interesting to be able to witness and think about the causes/solutions of the worst economic times since the Depression?

1:12 Karen Dynan: Well, it has been a humbling time for economists, certainly. Like most other analysts and policymakers, few economists saw the crisis and recession coming. It has caused a lot of us to rethink what we were taught about markets always functioning well and people always acting rationally. And about the limits of regulators.

1:12 [Comment From Wanda: ] So, is “re-gifting” bad for the economy?

1:14 Karen Dynan: Well, it’s a bit like the question of whether higher saving is bad for the economy. It is bad in the sense that it will make for a slower recovery. But, as I said earlier, there are important long-run benefits to higher saving.

1:15 [Comment From Sally: ] What else can the government do in the short run to create jobs? Do you like the proposals to spur the growth of small business? Or give new tax incentives to weatherize homes?

1:17 Karen Dynan: This is a really important question. I agree that small businesses are facing particular challenges when it comes to getting loans. They are more dependent on banks than bigger businesses that can get funding through the stock and bond market and banks are still under a lot of pressure. Small businesses are also more dependent on credit cards and home equity lines of credit, which are harder to get these days.

1:19 Karen Dynan: That said, survey evidence suggests that access to credit may not be the biggest problem for small businesses these days — according to the National Federation of Independent Businesses, small businesses see weak sales, high taxes, and regulatory obstacles as much bigger problems.

1:21 Karen Dynan: On the question of job creation more broadly, I support providing more money to states and localities so that they don’t need to lay off as many people. A payroll tax holiday tied to new hiring could also be helpful, but it can be difficult to design such a program in a way that doesn’t lead to people gaming the system.

1:22 [Comment From Matt: ] I’m curious how you think holiday travel will be affected this year. More people driving? Staying put?

1:23 Karen Dynan: Holiday travel will most likely be down relative to normal times. That’s pretty typical when the economy is weak. It’s much like the situation last summer when everybody was talking about “staycations.”

1:23 [Comment From Lana: ] How are other countries currently faring in terms of recovery?

1:25 Karen Dynan: The recovery in some parts of the world—particularly Asia—has been stronger and faster than expected. And, unemployment in parts of Europe hasn’t risen nearly as much as in the United States. That’s good news for us, as it boosts demand for our exports.

1:26 [Comment From Suzie: ] Haha! Your mention of “staycations” reminds me that now we’re seeing “frugalistas” for the holiday season! Are you a frugalista?

1:26 Karen Dynan: I’m afraid not. I have teenage daughters.

1:27 Fred Barbash-Moderator: Karen thanks very much. Great answers. Enjoy the holidays. And thanks to all our participants, with apologies for the ones we were unable to get to.

So long for now.

1:28 Karen Dynan: Thanks Fred and thanks to everyone who participated. This has been really fun.