Holidays May Be Last Stand For Tapped-Out Consumer

Everyone has heard predictions of a tapped-out consumer. And though they haven't materialized in the past, this time is likely to be different.

The American shopper is facing a housing slump, a credit squeeze, record-high energy prices, and a potentially weakening labor market. Although many economists expect the consumer to trudge along this holiday season, several expect it could be the last gasp for awhile.

Kathy Willens / AP

"We have to remember that the holiday season is the holiday season," said Bill Martin, co-founder of ShopperTrak. "It’s very high-purposeful shopping. When it comes right down to it, an individual shopper is going to want to make a nice holiday season for themselves and the people they love."

The National Retail Federation, an industry trade group, is projecting this year’s holiday sales will rise 4 percent from last year to about $474.5 billion. While that pace is below last year's 4.6 percent gain and the average growth of about 5 percent to 6 percent over the past five years, it is still a healthy increase.

"We’re not going to see a disastrous Christmas," said George Whalin, president and chief executive of Retail Management Consultants in Carlsbad, Calif. "It may be tepid."

Although Whalin does expect there to be some pressure from rising gas prices and falling home values, he suspects most people will continue to spend money on Christmas so long as they are free of concerns about their incomes and job security.

For the moment, personal incomes are holding on. But rising energy prices are siphoning off consumers’ disposable income.

Uncharted Territory

Gasoline prices traditionally fall in the winter months as demand ebbs from summer highs. But with oil prices flirting with $100 a barrel and low fuel stockpiles, that trend has reversed this year.

Guy Caruso, chief of the Energy Department’s statistical division, predicted this month that gasoline prices, now averaging $3.11 a gallon nationwide, will rise another 10 cents by December.

And as the temperatures return to a more seasonal chill, homeowners may get hit soon with rising home heating costs.

"We have never entered the holiday shopping season with gasoline prices up over $3 and energy prices up 40% year over year," said Merrill Lynch economist David Rosenberg. "In some sense, we are in uncharted territory."

Among the signs Rosenberg sees pointing to a "pretty brutal holiday shopping season" are low levels of consumer confidence and a reduced ability for consumers to take on more debt.

Notably, he expects consumer spending to continue to slow through the first half of next year as the economy experiences its first recessionary phase since 1991. Rosenberg projects the slowdown in consumer spending to drag down the growth of the gross domestic product to below a 1 percent annual rate in the current quarter from the brief 3.9 percent rebound posted in the third quarter this year.

One reason he cited for his forecast is that there are some "serious" signs of weakening in the labor market, with much of the recent job growth coming from only three sectors: government, health and education, and travel and tourism.

"Sixty percent of the economy is shedding jobs," he said.

What’s more, many other key economic indicators appear to have peaked in the summer, Rosenberg said.