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Retailers Take Hit As Consumers Slash Spending

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By ANNE D'INNOCENZIO, The Associated Press

Published: January 15, 2008

NEW YORK - More evidence of a dramatic slowdown in consumer spending surfaced Monday, as Sears Holdings Corp. warned a drop in sales would result in a profit shortfall and the world's largest retail trade group issued a downbeat sales forecast for 2008.

Shares dropped among retailers from jewelry chain Zales Inc. to Saks Inc., which operates luxury retailer Saks Fifth Avenue, as the spending malaise appeared to deepen and spread beyond lower and middle-income shoppers to more affluent consumers. The decline in retailers' stocks continued a yearlong downward trend.

Consumer spending, which accounts for two-thirds of the nation's economic activity, had been showing resilience, even as gas prices rose and the housing market fell. But recent data point to a sharper pullback, a trend that may tip the economy into recession.

American Express, whose customers generally are affluent, said Thursday it expects slower spending and more missed payments on credit card bills to hurt its profit throughout 2008. Upscale jewelry retailer Tiffany cut its 2007 profit outlook Friday as it reported a 2 percent decline in same-store sales, or sales at stores open at least a year, during the holiday period.

On Monday, Sears Holdings, which owns Sears and Kmart, blamed growing competition, the housing market slump and consumers' credit fears for sales figures that were expected to slash fourth-quarter profit by as much as 57 percent from the year-ago period. Meanwhile, the National Retail Federation predicted retail sales in 2008 will grow at the weakest pace in six years.

The reports come on the heels of sales reports Thursday by major retailers that showed the weakest holiday period since 2002.

"When all is said and done, we have probably entered into a recession. The weakness in the holiday season was the tipping point," said Deloitte Research chief economist Carl Steidtmann, who forecasts a decline in consumer spending that takes inflation into account in coming months. It would be the first since 1991, when the savings and loans crisis precipitated a recession.

Steidtmann said rising employment and incomes had helped offset surging gasoline prices and mortgage payments, but with the job market showing signs of faltering, shoppers are losing their nerve. On Jan. 4, the Labor Department said hiring practically stalled in December, driving the nation's unemployment rate to a two-year high of 5 percent. For all of 2007, wages increased 3.7 percent, less than the 4.3 percent gain in 2006.

"Consumers are feeling very pinched," Steidtmann said, adding that signs the "aspirational luxury" customer is retrenching are disconcerting, but the super wealthy are still spending. Any retrenchment of the affluent has negative consequences not only for stores, but for the boating industry and other luxury sectors, he said.

Some economists, including Rosalind Wells, are not predicting a recession but acknowledge a slowdown. "The consumer is full of anxiety," said Wells, chief economist at the National Retail Federation, which said total retail sales are slated to grow 3.5 percent in 2008. That's below last year's estimated 4 percent pace and marks the weakest growth since 2002, when retail sales climbed 3 percent. The retail sales figure excludes automobiles, gas stations and restaurants. The final 2007 figure will not be known until today, when the Commerce Department is slated to report December's total retail sales figures.

Wells thinks further interest rate cuts, along with a stimulus package from the government, could improve spending in the second half. Still, the worry is that such moves may help the economy but could be too late to make shoppers spend again.

Investors are becoming pessimistic, pushing down stocks of a wide variety of retailers Monday. While Saks' shares rose less than a penny, to $15.94, Sears' stock plunged 5 percent, or $4.79, to $91.38. Zales' shares fell almost 5 percent, or 64 cents, to $13.08. The Dow Jones index that tracks retailers' stocks fell about 9 percent in the past month and has fallen 9 percent in the past year.

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