A Bullish Black Friday

The current recession is unlike any other in the last couple of generations. Usually recessions happen because monetary policy gets tight or tax rates go up. Or, sometimes, like in the Great Depression, both of these plus rising trade barriers lead to a contraction in economic growth.

This time around, the recession is not due to tight monetary policy, higher tax rates or protectionism. It's due to a sudden and sharp plunge in the velocity of money--what we have been calling "risk aversion hysteria." This is where the speed with which money moves its way through the economy slows down as both consumers and businesses decide they want to increase their cash holdings.

Idiotic mortgage loans started the financial fire and overly stringent mark-to-market accounting rules acted as an accelerant, forcing financial firms to write down the value of their assets even when underlying mortgage cash flows were likely to grossly exceed fire-sale prices for mortgage securities.

When it appeared that money in banks and money market funds was no longer safe, consumers decided they would rather have money under mattresses instead of in bank accounts. This panic caused a sharp decline in consumer spending. Retail sales (excluding autos) grew 6% during the year ended in June, but just 1% during the year ended in November. With auto sales included, retail sales fell 4.1% in the year ended in November.

But fresh data on what's been happening on Main Street the past few days suggest the plunge in velocity may be either coming to an earlier end than most analysts expected, or that velocity may even be accelerating.

The National Retail Federation (NRF) says the number of shoppers either in stores or accessing online retailers, from Black Friday through Sunday, was up 17% versus last year and that the average amount spent was up 7.2%. According to the NRF, shoppers were busy buying clothes and electronics. Meanwhile, ShopperTrak, which monitors sales at shopping centers and malls around the country, says Black Friday sales were up 3% versus last year.

Obviously, these figures should be greeted with caution. The NRF numbers are based on a poll of consumers, not actual sales volumes, and the ShopperTrak data is for Black Friday only. It is plausible that, with relatively few shopping days this year between Thanksgiving and Christmas, consumers are buying more on a per day basis but will not buy more during the holiday season as a whole.