Black Friday Wins, Pocketbooks Lose

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MICHEL MARTIN, host: I'm Michel Martin, and this is Tell Me More from NPR News. Coming up, a final thought from me about having Thanksgiving amid the backdrop of the Mumbai tragedy. But first, it's official, the U.S. economy is in a recession, has been in one since December 2007, in fact, according to the National Bureau of Economic Research. As if we didn't know, right?

And yet, the day after Thanksgiving, so called Black Friday, the traditional start of the holiday shopping season, saw surprisingly strong retail sales, but is that a good thing or a bad thing? What role do consumers play in the nation's financial story?

Here to talk about this is our financial expert, Alvin Hall, and John Simons, he's senior personal finance editor at Black Enterprise. I welcome you both. Thanks so much for joining us.

ALVIN HALL: Very glad to be here today, Michel.

Mr. JOHN SIMONS (Senior Personal Finance Editor, Black Enterprise): Thanks for having me.

MARTIN: Alvin, let me start with you. So this group of economists, the National Bureau of Economic Research, is the arbiter of when we are or are not in a recession. They finally decided that we are. But why was there any doubt on this?

HALL: Well, I think they were concerned about the psychological impact upon Americans. They thought that if they said the R word too early, that people would rein in their spending, and that we would go into the recession officially much earlier. So it was really a mind game, if you will.

But as you and I have said on the show, if it looks like a duck, it quacks like a duck, it must be a duck. It's been clear that we have been in the recession since at least January and March of last year, but they really tried in every way to convince us that if we just spent a little more, we might be able to avoid it.

MARTIN: Now, as much as I want to talk more about that, but finally, before we turn to John, is there anything significant about the fact that these economists are now saying that recession actually started in December 2007? Why is that important?

HALL: It's important because that was the time when the numbers really started to go down noticeably. And they did not think it would continue to go down at such a steep rate. Since then, unemployment has spiked higher. The number of job loss claims have spiked. Corporate profits are dropping. It's going much, much worse than they ever thought it would.

MARTIN: And yet, John Simons, in terms of the overall holiday season, the National Retail Federation is predicting that sales are actually going to rise 2.2 percent from a year ago. Not a huge amount, but still, it's an increase from a year ago. Friday sales were strong. What's going on here?

Mr. SIMONS: Well, there are a couple of different things happening. There was a lot of before Friday sales numbers which were very good considering that we're now officially in a recession. Before that, there was a lot of pent up demands. Consumers were holding onto their money, doing the right thing for them, which is saving, paying down debt possibly, and not going out and spending at the ridiculous pace that we've seen over the last many years.

What happened is, retailers did a lot of heavy promoting, cost - you know, slashing prices, and they brought consumers into the stores. Now, what some people are saying is that consumers are going to now cut back again, that they've done the bulk of their Christmas spending, and that this is it for this year.

MARTIN: That was just a blip?

Mr. SIMONS: That's right. It's my understanding that holiday shopping can make up anywhere from 25 to 40 percent of retailers' annual sales.

MARTIN: So, I'd like to ask each of you, John, if you want to start. Is the level of spending over this weekend, the initial holiday shopping weekend, is that a good thing or a bad thing?

Mr. SIMONS: Well, for the economy it's - it's probably a good thing that consumers went out and did spending. I mean, if you're just purely looking at GDP, it's a great thing that consumers are out there spending. Consumer spending makes up two-thirds of GDP, and this is something that the economy needs right now. Now, the part that gets a little confusing here for many people is that what consumers need to do and what is needed to help the economy are two different things and...

MARTIN: Explain that.

Mr. SIMONS: They go two different directions.

MARTIN: Explain that because both you and Alvin have talked a lot about the level of indebtedness that Americans carry. So, tell me why is that different - what you're saying, that what the economy needs is not necessarily the same thing as what individual households need. Why is that?

Mr. SIMONS: Well, what people need to do is really kind of rein in their spending and cut down the amount of debt that they have. So, right now, they need to pay down those credit cards, pay down the debts, and try to save and try to live within their means. And that's something that's not necessarily going to help the economy in the short run right now.

MARTIN: Alvin, what's your take on this?

HALL: I think that consumer spending was a good thing, but if you look at the profits that the companies made from these deeply discounted sales, then it was poor for the company. What you saw in the stock market yesterday was a sell-off, the realization that the profits would not be there. Although the numbers of people going to the malls and spending money was up, the profits were going to be low. So everybody bailed out of all those stocks yesterday.

I agree with John that what the consumers need to do - save, cut debt, be very frugal right now - is completely opposite to what the economy needs, which is money going to the economy at a faster rate - people spending money, general profits for companies because that's the only way companies will be able to keep people employed.

MARTIN: If you're just joining us, this is Tell Me More from NPR News. We're talking about the latest news about the economy, the start of the holiday shopping season, and the impact that that could have on the economy with Alvin Hall, he's our regular contributor on All Things Money Related, and John Simons, senior personal finance editor at Black Enterprise. And Alvin, when did this economy become so dependent on consumer spending?

HALL: In the mid-1960s with the creation of that little thing called the Master Charge. This was the first time that a company created a credit card that various banks could sign up for. Prior to the creation of the credit card, people spent what they earned, basically, and they had to save up for it over a long period of time. With the credit card, you could then buy on money you had not yet earned, so people started spending more and more.

As credit cards proliferated, credit card companies, Visa, and everything proliferated. Everybody started to spend more and more of their future before they ever earned it. By the mid-'90s, most people had really maxed out on their credit cards. And then the wonderful thing of home equity loans and second mortgages came around, and people then would borrow against those in order to pay off the credit card debt so they could spend even more.

MARTIN: Is this so terrible?

HALL: Yes.

MARTIN: I mean, I know this sounds like a ridiculous question, but is that so terrible if it, in fact, has allowed people to live a higher quality of life? What's the problem?

HALL: It's bad when people spend to the point that they can't afford to pay off the debt. I've been trying to find out the actual numbers here, and I've been not successful in doing so. I want to find out how many people have actually never paid off their credit card debt, they have borrowed so far into the future that it'll be 10, 12 years before they are ever out of credit card debt. That's the problem.

All of us, the government included, must borrow sometimes in order to fund our future needs. You want to buy a house, you need credit. You may want to furnish your kitchen, you'll need some credit for a short period of time. But what people started to do, Michel, was to borrow for longer and longer period of times. They became too comfortable with carrying that debt on their backs.

MARTIN: So, let's go back to this question that John addressed, which is, there's a mismatch here between what is in the best interest of individual households and consumers and what's in the overall best interest of the economy right now? Do you both agree on that point?

Mr. SIMONS: Yes.

MARTIN: So if that is the case, what next? John, what's the answer to this? Does there have to be a massive restructuring of the way people conduct themselves as consumers? And if so, where's the economic energy going to come from?

Mr. SIMONS: You know, that's an interesting question, and I think even economists have trouble with that one right now. I think what consumers need to do is do what's best for them. And what's best for them is to rein in your spending, live within your means, pay down debt.

I've talked to a lot of economists in the recent weeks, and they keep saying that the answer to this problem is to get more stimulus out there, and that's probably what the federal government is likely to do. They're likely to try to put more money into consumers' pockets and convince them to get out there and juice up and boost the economy by getting out and spending.

Hopefully, what people will do with money is pay off some of the credit card debt, which is equally, in some ways - it's not immediately stimulative to the economy, but it equally contributes to economic growth.

MARTIN: Alvin?

HALL: Starting in the mid-'70s, technology came onto the scene, and technology transformed the way that Americans live, the way that we did business. It transformed our lives and stimulated growth that has lasted almost 20 years. It was a phenomenal change in America. In 2000, we saw the tech bubble burst.

After 2000, what then led the growth in the economy was leverage. Congress lowered the margin requirements for firms. Interest rates remain abnormally low, and what happened? Everybody started to borrow to fund acquisitions at the corporate levels. At the individual levels, it's just expanded. That was not sustainable in the long term.

To my mind, what Congress and the new administration needs to do is to really look carefully at those infrastructure programs that he keeps mentioning that will add to Americans' lifestyle but also will put people back to work. I think it's no longer what industry is going to suddenly appear out of the sea and save us.

I think we're going back, in essence, to the FDR days, when the spending has been so abusive, the use of credit has been so out of hand that the government needs to step in and give people that old fashion sense that they can earn a living wage.

MARTIN: John Simons, do you think that most consumers understand that there's a problem here? This is not just an overall individual problem, this is a widespread structural problem in the American economy that people have been - what's the word - acculturated to conduct themselves as individual consumers in a way that is deleterious to their long-term financial interests?

Mr. SIMONS: Well, I've thought about that and sort of argued this point with a lot of people about the idea of whether this particular financial crisis will have an effect, a long-term effect, on consumers' relationship with money and debt and savings in the way that maybe the Great Depression did.

I mean, the Great Depression changed an entire generation's sort of thought patterns around money. And some people have said that this might have that same effect. I'm not quite sure about that, and based on Friday's numbers, we'll have to - sales numbers, the stores - we'll have to see, going ahead, whether consumers are changing their behavior.

MARTIN: Alvin, I'm going to give you the final thought. What do you think - to John's point, do you think that this current situation will have a long-term effect on individuals' behavior?

HALL: I'm afraid not. I think people have short-term economic memories. I also think that we have been acculturated to think that we can find our happiness and find joy through retail therapy. I think that's going to be hard to people to give up. If the recession lasts a very very long time, it will then sit in people's stomachs a lot longer. But if it goes away too fast, tomorrow, we'll be partying again.

MARTIN: We'll have to see. Alvin Hall is our regular contributor on financial matters and the economy. John Simons is senior personal finance editor at Black Enterprise. They were both kind enough to join me from our studios in New York. Gentlemen, I thank you both so much.

HALL: Thank you very much.

Mr. SIMONS: You're welcome.

MARTIN: Well, you just heard our personal finance gurus give their insights about what consumers and the economy needs. Of course, now, we want to get into your business. What's your plan? Are you changing your shopping plans this holiday season? Are you and your family making different decisions about your spending than last year or not? To tell us more, and to read what other listeners are telling us, go to our blog at the Tell Me More page at npr.org. You can also call our comment line at 202-842-3522. That number again is 202-842-3522.

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