Black Friday, fuelling the engine of the American economy?

black friday redactiecommissie 2-12-2019

For most of you it probably did not went by unnoticed. Last Friday and the days surround it, there was a rush for the best shopping deals at retail and web shops. Black Friday with its crazy discounts was reigning in the country again. Black Friday, traditionally the day after Thanksgiving, owes its name to the chaotic situation in downtown Philadelphia caused by shopping traffic on this day. That is at least one of the stories, another explenation for the name is that before thanksgiving the companies were still in the minus and after thanksgiving it was the first day that they were in the plus (black). The phenomenon in its current form crossed the Atlantic roughly ten years ago when Amazon set foot in the United Kingdom, continental Europe followed a few years later (The Washington Post, 2019).

Besides being the perfect moment for consumers to purchase their ‘necessary’ new clothes or electronics, Black Friday also has major consequences for the economy. Especially in the United States (US), where the economic structure is for a large part based on domestic consumption of domestically produced goods. Black Friday is a real catalyser of consumption and therefor growth. If you dive into the composition of the US Gross Domestic Product (GDP), captured in the iconic equation Y/(p)= C + I + G (E-M). One finds that it composes of 69% consumption (C), 19% private investments (I) and 17% government spending (G), minus a 5% deficit on the current account (EX-IM). To put this in perspective, private consumption only covers a meagre 55% of the European GDP (the Balance, 2019).

It has become clear that private consumption is the cornerstone of the US economy. Therefore it will probably not surprise you that also the lion’s share of output growth is realized in this segment. In the diagram below, you will find GDP growth measured quarter over quarter (of the prior year). While currently growth in private investment and government spending seems to stagnate, all hope is set on the consumer to reach for its wallet in the fourth quarter. (Bloomberg, 2019).

Black Friday is part of the holiday shopping season. That includes November and December until Christmas Eve, the 24th. Historically, this has always been a period of a large purchases by US consumers. The ‘National Retail Federation’ (NRF) has been gathering sales figures for this period for many years. Over the past 10 years, the total sales have been growing on average by an annual rate of 3.5%. And the NRF foresees a further growth of 3.8 to 4.2% to a total sales level of 727.9 to 730.7 billion US dollar for this season. This new record level of sales could be accomplished by the high level of disposable income the US consumer currently receives. Unemployment at only 3.6% is the lowest in the past 50 years and scarcity of labour has further driven up wages.

The expected sales figures are an important indicator for consumer confidence and therefor future consumption. As private investments are lagging and the trade war with its tariffs puts further pressure on export, only the current ‘holiday shopping season’ remains to spark the engine of the US economy again.

While no-one can deny the magnitude of the importance of consumption levels for the US economy. Criticism towards Black Friday has been rising sharply over the recent years, especially abroad. Many find that the event characterizes the linear economy in which we live, where our current consumption- and pollution level lay beyond the limits of what our ecosystem can support. In France environmental activists, supported by their minister of ecological affairs, requested a boycott of ‘Black Friday actions’. The predecessor of the French minister already proposed an amendment last week to prohibit Black Friday related actions. Which will be voted upon in parliament coming month. I doubt if this critical attitude will reach the US in the near future. But when it does, the Americans would more than anyone else need to reconstruct their entire economy. It will become costly.

By: Joris Hoefnagel