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Shoppers May Not Be In Holiday Spirit, Analysts Warn

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The Associated Press

Published: June 26, 2008

NEW YORK - The holiday shopping season is still months away, but a growing number of economists are predicting it could be worse than last year - which is to say, disastrous.

Soaring fuel and food prices, a slumping housing market and a falling stock market have depressed consumer confidence, raising fears that shoppers will pull back even more in the critical months ahead.

With consumer spending accounting for two-thirds of U.S. economic activity, the economy's health is at stake. While Americans have cut back on nonessentials such as clothing, spending has remained fairly resilient despite their darkening mood.

However, analysts worry that once the short-term benefits of the federal stimulus checks fade, shoppers will retrench further, possibly tipping the economy into a recession.

"It makes us nervous," said Deanna Zammit, a Brooklyn resident, citing all the bad economic news. The freelance writer, who purchased a condo a year ago in Brooklyn with husband John Miller, a product designer at an Internet software firm, said they are secure in their jobs, but the slowing economy and inflationary pressures have forced them to pare down.

"I'm not going shopping at Macy's, and I am not buying any more summer clothes," Zammit said. "Food and gas prices are stinging us, and I am watching where things go."

Two downbeat reports released Tuesday - on consumer confidence and the housing market - show shoppers are under increasing strain. The Conference Board's Confidence Index fell for the sixth month in a row to the lowest level in 16 years. And the measure that assesses how consumers feel about the economy over the next six months dropped to the lowest point since the private research group began doing the surveys in 1967. Shoppers are so anxious that fewer people plan to buy big ticket items such as televisions and appliances, according to the Conference Board report - a bad omen for Christmas giving.

Two more reports - Standard & Poor's/Case-Shiller home price indices and Office of Federal Housing Enterprise Oversight index - showed record year-over-year drops in April, a signal the housing slump is not only deepening, but encompassing markets that once held their own.

Meanwhile, American Express warned Wednesday that consumer credit is worsening faster than it had anticipated in June as the U.S. economy continues to falter.

"People are feeling poorer and that means less spending. ... The holiday season will be bad - if not worse than the last year," said Bernard Baumohl, managing director and chief global economist at The Economic Outlook Group LLC.

Baumohl added that while consumer confidence and spending don't move in tandem on a month-to-month basis, he believes that the persistent and precipitous fall in confidence will affect spending within three to nine months.

"We are concerned about spending in the second half," agreed Frank Badillo, senior retail economist at consulting company Retail Forward. He said that excluding benefits from rebate checks, he expects sales to be weaker in coming months. If job conditions worsen, he said, the total holiday sales growth could fall below last year's level, which according to the National Retail Federation was the weakest growth since 2002.

After struggling with sluggish sales last year, stores were starting to see a boost in recent weeks from the rebate checks, but those benefits are expected to evaporate. Nationwide, sales at stores open at least a year are expected to be up 2 percent to 3 percent in June, after rising a better-than-expected 3 percent in May.

Lynn Franco, director of the Conference Board's Consumer Research Center, said the holiday period doesn't "look too good" at the moment. "There will be a lot of heavy incentives" to get people to shop, she said.

At Starbucks Coffee Co., which has seen patrons make fewer latte trips, 1 million customers have signed up for the company's rewards card launched in April, said Brad Stevens, vice president of customer relationship management. That indicates shoppers are looking for a good deal. He expects to enhance the card's offerings for the holidays.

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