Holiday Spending: A Gift for the Economy

December 20, 2017

This 7-minute podcast was released Dec. 20, 2017.

Kevin Kliesen

Will the economy get the equivalent of cool electronics or lame socks? Listen to St. Louis Fed economist Kevin Kliesen explain what economists track during the holiday season to determine if it will be good for the economy overall. Did you know that personal consumption accounts for 69 percent of U.S. GDP and that a large percentage of the country’s retail sales occur in the final two months of the year? Consumer sentiment has hit a 17-year high, but does that translate into more spending? Come find out in a new holiday-themed podcast, economics style.


Jennifer Beatty: Welcome to Timely Topics, a podcast series from the St. Louis Fed. I'm Jennifer Beatty, your host for a holiday type of podcast, economic style. Our guest is Kevin Kliesen, business economist and research officer at the St. Louis Fed. Welcome Kevin. So it's December and we're in the midst of holiday shopping season, and we want to know what economists look at to see if it's going to be a good year. Farmers may watch weather forecasts and commodity prices to determine if it'll be a good growing season. What do you watch, Kevin, to understand how the economy is faring during the holidays?

Kevin Kliesen: Well, obviously one thing we look at pretty closely is holiday retail sales. The consumer or consumption is the largest part of GDP, so you know a large percentage of retail sales occur in the final two months of the year, so that's pretty important. By all indication, it looks like it's going to be a pretty good year, so retailers seem pretty happy.

Beatty: What percentage of retail sales go into GDP?

Kliesen: Consumption is roughly 69 percent of GDP. Retail sales would probably be somewhere closer to 25 percent, give or take, so it's a pretty sizable percentage of the economy.

Beatty: I've been reading that consumer confidence hit a 17-year high in November. What's driving that?

Kliesen: A lot of things, I think. The stock market continuing to set records has probably helped fuel that rally in consumer confidence. Gasoline prices still seem pretty low, labor markets are good and the unemployment rate is low, so there's a lot of different factors that probably explain that, but in general, the economy looks pretty good.

Beatty: OK, great. So, people might be feeling good about things, and so their confidence is high, but does that necessarily translate into spending? What's the relationship between consumer sentiment or consumer confidence and actual spend?

Kliesen: You would intuitively think it would matter a lot, but a lot of economic research suggests that while it does matter, it's not the key driver. So, certainly the fact that consumer confidence is very high does portend probably a favorable outlook for consumption spending and retail spending, but I think what economists like to do is look at the fundamentals. Again, look at how fast incomes are growing, where the unemployment rate is, where job growth is—those fundamentals I think probably matter more.

Beatty: OK, and does it matter whether consumers spend on cash or credit? Is it measured in the same way to an economist?

Kliesen: So if you spend on credit, you're basically spending out of future income. So from that standpoint, you're sort of taking consumption from the future and moving it to the present. In terms of total effect on consumer spending, it generally doesn't matter over the near term whether people spend cash, or use it buying goods using cash or check or credit. Like the old Yogi Berra line, cash spends just as good as money.

Beatty: But debt levels certainly play a role in the effect on consumer spending. So describe for me the relationship between consumer spending and then debt levels and how ultimately that plays itself out into the economy overall?

Kliesen: Clearly, if debt levels get too high and incomes begin to decline or grow slower, then consumers can have a crunch. If their debt is continuing to increase, that means their interest payments as a share of income are continuing to grow, so that will clearly have some effect on consumer spending to the extent that they're taking more out of their income to service that debt. So it's like the housing crisis in the 2000s: As mortgage debt continued to rise sharply, that had a very significant adverse effect on the economy.

Beatty: We talked a little bit about how critical consumption is to the US economy overall. How does that differ or is it similar across other Western countries? The UK economy, for instance, is that tilted toward consumer spending as well?

Kliesen: The US is about 69 percent, the UK is somewhere around 85 percent, Japan is somewhere around 75 percent, so at least (in) those two economies consumer spending as a share of GDP is higher. Now if you look at China, for example, China's consumption spending is probably around 50 percent. So they save a lot more (of) their money because they don't really have the built-in income support levels that we have in here in terms of retirement.

Beatty: I want to focus a little bit on retail sales. You talked about a potentially good year in retail sales. Does it matter how consumers spend that retail sales, whether they spend it online, whether they spend it in a brick-and-mortar shop, whether they spend it at their local business down the street? It certainly might matter regionally, but does it matter to the US economy overall?

Kliesen: In terms of how it flows into GDP, it doesn't really matter, but you can have these sort of second-order effects. For example, if you look at employment at department stores that are very sensitive to internet sales, employment in those stores has been declining for a while now. If you look at, for example, non-store retailers, you think of the big online retailers, (and) their employment growth is increasing dramatically, employment and warehousing is growing very sharply. Another effect obviously is when you go to the store and you buy a good, you're going to pay a tax and part of that is state tax or local tax depending on where you live, and where you buy the good from on the internet, you may or may not pay a tax. So obviously more people are buying goods on the internet, and they're not paying tax on that, then that obviously can affect state and local finances.

Beatty: What's your prediction, Kevin, is it going to be a good year for retail sales and for the holidays?

Kliesen: It certainly looks like that. So far, Thanksgiving sales and sales forecast for the year for December certainly look pretty good, and I think one of the things that really helps it is that the economy looks like it's growing and improving and that will, I think, serve as a solid foundation for the consumer.

Beatty: Great. Well thank you for joining us and helping us better understand the numbers behind the holiday shopping season.

Kliesen: You're welcome.

Beatty: For more information on economics, our products and research, please visit or listen and subscribe to our Timely Topics podcasts on Stitcher and iTunes.

Economists and experts talk about their research, topics in the news and issues related to the Fed. Views expressed are not necessarily those of the St. Louis Fed or the Federal Reserve System.

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