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Gloom Over Holiday Sales May Be Overdone

Bah, humbug! High energy prices, the housing slump and worries about a recession may not have much of an effect on holiday sales this year.

The International Council of Shopping Centers is expecting sales growth of about 4.5% in November and December, down from 4.8% in 2006. The National Retail Federation last week estimated sales growth of 4.0%, vs. the 10-year average of 4.8%.

"This doom and gloom from housing to the wealth effect to energy prices, all of it is just so much talk," say Conference Board economist Ken Goldstein, with some exasperation.

Given the real estate slump -- from higher rates of mortgage delinquency and home foreclosure and record energy prices, as well as the possibility of a looming recession -- it is reasonable to think that those forces, both real and imagined, might create a sizable drag on consumer spending.

Shopper with Bloomingdales Bags
AP
Shopper with Bloomingdales Bags

Nevertheless, given energy and real estate industry dynamics, that’s unlikely to be the case.

Lou Pugliaresi, President of the Energy Policy Research Foundation, says there’s a "good chance" energy prices will be neutral or slightly positive to the overall economic equation in the months ahead.

He says it is "somewhat doubtful" gasoline prices will average $3 a gallon again, with refineries operating closer to capacity than they were during the summer, and doubts crude oil prices, which recently hit a record high of about $84 a barrel, are "sustainable" at such levels.

Don’t Blame Housing

As for the housing market, concerns about consumers slamming on the brakes are probably exaggerated, as is housing’s impact on consumer spending during the bubble years.

Home equity extraction –- the sale of a property, mortgage refinancing or home equity borrowing –- created a so-called wealth effect, boosting income and thus presumably spending.

But according to preliminary research by two Fannie Mae economists, the effects of home extraction –- which peaked at $955 billion in 2005 -- are "not particularly strong."

“We didn’t see a big consumption effect,” says co-author Amy Crews Cutts. “You don’t do a cash-out like you do an ATM transaction.”

Those days are long gone any way. And for all the talk about the current housing slump, furniture and home furnishings are up slightly more than 2.0% from a year ago August.

"You see it as a slowdown, not a contraction," says Michael Niemira, chief economist and director of research at the International Council of Shopping Centers. "We’ve seen a slowdown in underlying consumer spending since February."

Follow The Economy

Given the current environment, the holiday shopping season will mostly likely reflect the state of the overall economy as growth continues to slow with the expansion nearing its sixth full year.

The economy is expected to grow 2.0% to 2.5% this year, versus the 2004-2006 period when it averaged 3.2% growth.

Retail sales, as measured by the federal government, reflect that broader trend. Though sales through August are up 3.7% from a year ago, the annual increase is the smallest since the corresponding 2002-2003 period, which marked the early stage of the recovery.

Equally telling, perhaps, sales in the category of electronics/appliances -– which are likely to make it onto a holiday shopping list -- are up about 3.0% year-on-year through August.

Another positive for consumer spending is strong income growth. Personal income, as measured up the government, is up 5.2% so far this year.

Niemira says the his group’s analysis of the back-to-school shopping season show’s consumers are more price conscious than a year ago and that likely to “be a key to the upcoming holiday season.”

No too mention the old Wall Street bromide that when it comes to consumers, watch what they do not what they say

Goldstein, for one, says he’ll be "surprised" if holiday sales are very different from last year. "This has been a very resilient consumer."

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