A Bad Weekend at Retail Is Good News for Consumers

I may never forget the moment when I drove into the Ikea garage on Friday morning and said, “Oh my God! Are they open?” I had fantasized that I might see the garage nearly full, but in my first glance, the lights were all on, but I couldn’t see any cars at all. It took only a second for me to realize that it would be impossible for any U.S. retail store to close for the day after Thanksgiving — they call it Black Friday, after all. And it took only another second for me to advance far enough to see that there were cars at the front of the garage, filling at least 20 percent of the spaces. It was similar to what you would see at this store on a normal Saturday.

Inside the store, and the various other stores I visited over the weekend, I saw a fair number of shoppers, but without the hype that often accompanies Black Friday and the Thanksgiving weekend. Shoppers were more relaxed, not feeling much pressure. This is partly due to the very limited discounts of this year, but also, I am sure, because shoppers were not putting much pressure on themselves. It was like they were saying, “I have all day to shop, and all I need to be ready for the holidays is these few things I have on my list here.”

That was true inside the stores, at least. Out on the highways on Friday, driving speeds were unusually high with shoppers rushing from store to store. I was startled by the scene of dozens of drivers blowing right past multiple police cars, part of an expanded police presence on the highways for the holiday weekend. Perhaps what this means is that people had limited time for shopping, but were determined not to stress out over it.

What I saw is consistent with the anecdotal reports from the extended shopping weekend. “People are going to buy for the holidays, but they’re not going to go crazy,” as Aaron Task summarized the situation on Tech Ticker. Multiple reports said that shoppers had lists and budgets and were sticking to them.

This may be bad news for retail, but it is good news for consumers, who are buying what they need and want, but not getting sucked into the retail frenzy. Economic statistics will record the reduced retail spending of the holiday season as a negative, but that doesn’t necessarily mean it’s bad for the economy. I would rather see consumers continue to pay down their credit card balances, because in the long run, what is good for consumers is good for the economy.

Black Friday Fails to Rescue Retail

Early reports from Black Friday indicate that the sales totals that day were about the same as last year. But this is not as positive a note as it might appear on the surface.

• Last year, serious Christmas shoppers had already been shopping for three weeks before Black Friday hit. Black Friday was the day they finished their shopping, in many cases. This year, many did not get out to the stores until Black Friday, or perhaps Thanksgiving, the day before. They still hoped to finish their shopping obligations in just one day. This means that the total shopping is falling far short of last year.
• The deep discounts of last year have not been repeated this year. If shoppers spent about the same amount of money on Black Friday, they bought fewer things — about a third fewer.
• Shoppers were more easygoing, more relaxed, this Black Friday than on any in recent memory. They are not putting as much pressure on themselves. This confirms the surveys in which shoppers said they expect to spend less this year (30 percent less, according to one survey).
• According to reports from Friday, far fewer shoppers are spending with credit cards this year. Last year, nearly half of shoppers were paying for holiday purchases with credit cards. This year, it is only about a third. Without the credit card, it is much harder for shoppers to spend more than they had planned.

In spite of the gloomy picture for retail revenue, there is good news for retail earnings. With the credit crunch, this season is certain to be more profitable than last year. This is because, with credit hard to come by, retailers have loaded their stores with much less merchandise than in any year in recent memory. With thinner stock, there aren’t many deep discounts. And by mostly clearing off the shelves, retailers will have less to liquidate at a loss in January. To the extent that this works out, retailers will surely want to repeat this process in coming years, even if credit becomes widely available again.

In financial terms, lower revenue with a higher markup can give you a higher profit. This is good news for retailers, but bad news for the manufacturers, importers, and shippers, who have less merchandise to manufacture and deliver.

Las Vegas and Dubai

The story behind the financial squeeze gripping Dubai is eerily similar to what we have already seen in Las Vegas. The two places are similar to begin with. Both function essentially as isolated city-states. Las Vegas is a four-hour drive across the desert from Los Angeles; it and its suburbs contain most of the population of the state of Nevada. Dubai is a city-state in its formal political structure, with half of the population of the United Arab Emirates, at the end of the Arabian Peninsula.

And both seemed to be trying to build their economies on top of a style of excess, particularly when it came to buildings. It seemed like a brilliant strategy for a while, but began to break down in 2007, with projects canceled, workers leaving town, and businesses not earning enough to pay back the bank loans. In Las Vegas, there have been thousands of foreclosures and a collapse in real estate values. Dubai on Thursday suggested it might stop paying on its debts for six months.

The economic lesson from these two stories, if there is one, is that excess by itself cannot serve as an economic base. If a place wants to use excess as a selling point, there has to be considerable substance behind it to serve as the selling proposition. What Dubai and Las Vegas had to offer turned out not to be enough to pay for all that massive construction.

This Week in Bank Failures

How much money did banks get from governments and central banks at the height of the financial system breakdown late last year? The Bank of England revealed on Monday that it had provided emergency loans of £61.6 billion (about $100 billion) to two British banks. The loans were repaid in January, but were kept secret until this week to avoid causing alarm. In the United States, the Fed routinely makes emergency loans to banks, but keeps them secret, not wanting the public to have any idea how frequent bank runs are. This year, as Congress has considered measures to audit the Fed, Fed chair Ben Bernanke has said loudly and repeatedly that this would cause substantial harm to the banking system, and this is probably the effect he is referring to.

Developments this week: A U.K. government report recommends that banks disclose the number of employees they pay £1 million or more per year. Previous salary disclosure discussions had focused only on executives, but the report estimates that more than 1,000 other employees are also paid more than £1 million a year. ◾ Dubai World suggested yesterday that it might miss payments due in December for $60 billion in debt. The idea of a Dubai insolvency has stirred fears of a new global financial meltdown simply because of the financial size of Dubai’s activities. Dubai World owes much of its debts to banks worldwide and to Japanese construction companies. Dubai’s liquidity has been hurt by last year’s decline in world oil prices and by the decline in value of $10 billion in U.S. real estate it purchased in 2006–2007. ◾ Banks made a tiny profit in the third quarter. Total earnings for FDIC-insured banks were less than $3 billion. During the same period, bank assets declined by $54 billion, or 0.4 percent, and staffing was cut by by 23,655, or 1.1 percent. Nearly all categories of bank loans are falling: real estate loans, down 2.7 percent from the previous quarter; commercial loans, down 6.4 percent; credit card balances, down 1.3 percent. ◾ When Colonial Bank and Taylor, Bean & Whitaker failed in August, Bank of America failed to maintain custody of at least $1 billion in collateral that it was holding as trustee in deals involving the two companies. That’s according to lawsuits filed separately by BNP and Deutsche Bank against Bank of America this week.

Giving Thanks When Everything Is Changing

It is not an accident that the Thanksgiving holiday comes at the end of one season and the beginning of another. It is a holiday created, first and foremost, to give thanks for having food to eat, and the most powerful time to do that is near the end of the harvest season when the stores of food have reached their maximum size for the year.

You only have to look beyond this particular moment to realize that, as winter wears on, the amount of food that is stored away has to decline. This is the nature of food: we are, every day, deciding how much to eat today and how much to save for tomorrow. If we are giving thanks for food, this can serve as a reminder to be thankful for every fleeting thing that we build our lives out of — to be thankful even when everything is changing.

The tendency, sometimes, is to be disappointed at the things that are no longer here or that are not here yet. Life is sunnier, though, and you live your life in a bigger, bolder way, if you don’t limit your thankfulness to the here and now, or to the most permanent and reliable things you enjoy in your life. This Thanksgiving, be thankful for everything that helped, however briefly, to bring you to where you are. Also be thankful for everything you are prepared to come upon in the future, even though the actual shape of the future is unknown. When everything is changing, you can still feel thankful.