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Cautious consumers could slow holiday sales

Holiday sales are expected to grow at the slowest pace in five years as shoppers fret about jobs, tight credit and slumping home prices, according to a forecast from the world's largest retail trade group.
/ Source: The Associated Press

Holiday sales are expected to grow at the slowest pace in five years as shoppers fret about jobs, tight credit and slumping home prices, according to a forecast from the world's largest retail trade group.

That could mean lower prices and big pre-Thanksgiving sales blitzes as merchants compete for a piece of the holiday budget.

The Washington-based National Retail Federation predicted on Thursday that total holiday sales will be up 4.0 percent for the combined November and December period, the slowest growth since a 1.3 percent rise in 2002.

Holiday sales rose 4.6 percent posted in 2006 and growth has averaged 4.8 percent over the last decade.

NRF's total retail sales figures exclude business from auto dealers, gas stations and restaurants. The results also exclude online sales.

"I think consumers will be cautious,'' said Rosalind Wells, chief economist at the NRF. "The average person will be a little more restrained. It's not to say they will stop buying Christmas gifts, but the spending will be more practical.''

A big issue, according to Wells, is the job market, which show edits first drop in job creation in four years in August.

"Everyone knows the housing market is terrible. The big issue will become employment and income,'' she added.

Amid such economic challenges, Wells said stores could be even more aggressive about price cutting than last year.

Chris Donnelly, a partner in the retail practice at consulting group Accenture, said a key question is whether many stores will offer deep price cuts traditionally reserved for the Thanksgiving weekend before the holiday kickoff.

"The Thanksgiving holiday season is a bit of a fire wall. The question is, will (stores) jump that fire wall?'' he said.

Wal-Mart Stores Inc. stood out last year by offering big price cuts on toys and then on electronics starting mid-October in an effort to lure shoppers.

Consumer spending growth has been slowing since the beginning of the year as shoppers have been hit with higher gas and food prices and a slowing housing market. Back-to-school sales were solid, but escalating problems last month in the credit market, rising defaults and financial market turmoil raised more concerns about consumer spending.

While the Federal Reserve's decision Tuesday to cut its benchmark interest rate by half a point was applauded by Wall Street, many economists say it won't do much to help spending this holiday season. The rate cut means consumers could find lower rates on loans for big purchases like cars, but it won't be a big help for families struggling with a weaker job market or slumping home prices.

"It will soften the downside and that is the key here. You want some sort of underpinning of the economy,'' said Michael P. Niemira, chief economist at the International Council of Shopping Centers. "But it cannot address the housing problem directly other than pouring in some liquidity.''

Niemira and others believe that luxury stores like Saks Fifth Avenue should continue to do well, as its well-heeled consumers keep splurging on status handbags and shoes.

Electronics should also be a bright spot, underscored by a bullish forecast from Best Buy Co. Inc., the nation's largest consumer electronics retailer.

But the apparel business at mall-based stores remains a mixed bag, Niemira said. One factor hurting sales is that there are no clear must-haves. This holiday season, retailers will be resurrecting cashmere and focusing on metallic and gold accents.

Discounters like Wal-Mart could see higher customer traffic if shoppers trade down to lower-price stores to save money. But at the same time, the discounters will be hurt by the economic woes of its core shoppers.

Besides worries about the economy, consumer concerns about safety could dampen holiday sales. There have been a slew of recalls of Chinese-made products, particularly toys decorated with lead paint. More than 80 percent of toys sold in U.S. stores are made in China.

Donnelly noted that shoppers may divert their spending for their children to other items like clothing.

"U.S. consumers are hard to predict. Frankly, it is anybody's guess. Most people have a budget and so the question is, how do they allocate it?'' he said.