A Dose of Bah, Humbug for Holiday Sales Growth

Major retailers are reporting healthy gains in November revenues, adding more evidence that holiday sales will be significantly higher than last year. The National Retail Federation estimated that the kickoff of holiday shopping season on Black Friday weekend gained a very respectable 9.2% to $45 billion. Overall, retail sales are expected to climb between 2.3% and 4% this season.

Those rising retail sales figures are adding to the list of positive economic developments coming as 2010 winds down, but how important are holiday sales in the larger scheme of things?

Though holiday retail sales numbers are often held up as proxies for the U.S. economy as a whole, the reality is that they account for a very modest slice of our economic activity. The 2010 U.S. GDP is projected to be about $14.7 trillion, while total holiday retail sales were $504 billion in 2009. That means holiday retail sales are about 3.4% of the U.S. GDP.

Furthermore, holiday revenues don't really change much from one year to the next. According to the National Retail Federation, holiday season sales dipped by $21 billion decline in the recessionary 2008 season, but that was just a 4% decline from 2007. By contrast, 2009 saw sales rise by $10 billion, about 2%. Another 2% gain this season would return holiday sales to pre-recession levels.

Here are the annual statistics:

2007: (pre-recession) Holiday sales: $516 billion
Holiday sales as percentage of annual retail sales: 19.5%

2008: Holiday sales: $495.5 billion
Holiday sales as percentage of annual retail sales: 18.6%

2009: Holiday sales: $504.8 billion
Holiday sales as percentage of annual retail sales: 19.4%

In a $14.7 trillion economy, a $10 billion to $20 billion rise or fall is about a tenth of a percent -- not big enough to move the needle one way or the other. And since the Black Friday weekend sales are less than 10% of the entire seasonal total, Black Friday may not be as robust an indicator as many assume.

Retail insiders also report that the period between Dec. 15 and Dec. 25 accounts for 40% of holiday business -- another reason not to read too much into Black Friday weekend numbers.

What Does a 4% Rise in Holiday Sales Really Mean?

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Let's say that 2010 holiday sales gains come in at the high end of estimates: a 4% rise. Based on 2009 sales of $504 billion, that 4% increase would come to $20 billion -- $4 billion above the pre-recessionary level reached in 2007. So if the forecasts of analysts are relatively accurate, then 2010 holiday sales might rise $20 billion to $524 billion.

But according to the Bureau of Labor Statistics' inflation calculator, it takes $1.05 to buy what $1 bought in 2007. That 5% increase means that, adjusted for inflation, sales in 2010 would have to reach $541 billion to truly match the 2007 total.

So, while it would be welcomed by retailers, that 4% rise in sales wouldn't quite lift inflation-adjusted sales to the 2007 level: That would require a 7% or 8% gain.

Importance of Retail Overstated

We often read that consumer spending is about 70% of the economy (some analysts say it is more like 60%), but the retail sector is only the "value added" part of retail sales. If we look at the entire retail sector of the economy, we find that it is 7.9% of the GDP, compared to a 21.4% share for the finance, insurance and real estate sector.

Given that holiday retail sales are a modest 3.4% of the U.S., economy, and that a 4% rise of $20 billion is a wafer-thin slice of that modest amount, it seems the importance of holiday retail sales in the economy is being overstated.

If we really want to assess the health of the economy, perhaps we should focus on the numbers that reflect the big picture, such as employment, capital investment and personal incomes.