Holidays May Be Last Stand For Tapped-Out Consumer

"Consumers are fragile," said Mark Zandi, an economist at Moodys.com. "They are still spending, but increasingly with less gusto."

Amy Sancetta / AP

The recent economic boom was marked by a heavy reliance on debt and rising home values to support the good times. A "good portion" of consumers are facing personal balance sheets that are "pretty bad," Zandi said.

From 2004 through 2006, Americans pulled about $840 billion a year out of residential real estate, via sales, home equity lines of credit and refinanced mortgages, according to data complied by economist James Kennedy and former Federal Reserve Chairman Alan Greenspan. These so–called home equity withdrawls financed as much as $310 billion a year in personal consumption from 2004 to 2006, they estimate.

In recent months, consumers have slowed the amount of debt they are taking on. This may be an important indicator that the consumers are beginning to try to live within their means, said Frank Badillo, a senior retail economist at TNS Retail Forward, a Columbus, Ohio, consulting firm.

The latest TNS Retail Forward holiday survey showed lower-income consumers were particularly cautious about the holiday season, with more than one-third planning to spend less on gifts than they did last year. Even high-income consumers plan to show restraint, with about one-quarter planning to reduce their holiday spending.

Slow Holiday Hiring

There are other panic-inducing signs coming from directly from the retailers. Holiday season hiring is shaping up to be just as bad, if not worse than in 2001, according to recruitment firm Challenger Gray & Christmas.

According to the Bureau of Labor Statistics, employment among retailers in all categories nationwide grew by 71,700 jobs in October. In comparison, retailers added 95,700 new workers in October 2001.

Retail Employment: Number of Holiday Hires 1997-2007

Year	Average Monthly Employment	Average Monthly Employment During Holiday Season	Number of Holiday Hires	% Increase in Holiday Employees vs. Jan-Oct	Holiday Employment Change (yr/yr)
2006	15,319,000	15,816,000	596,000	3.91%	-5.25%
2005	15,150,000	15,779,000	629,000	3.99%	19.96%
2004	15,034,700	15,559,050	524,350	3.37%	7.33%
2003	14,917,300	15,405,850	488,550	3.17%	8.24%
2002	15,025,100	15,476,450	451,350	2.92%	12.14%
2001	15,238,600	15,641,100	402,500	2.57%	-34.93%
2000	15,279,800	15,898,400	618,600	3.89%	-9.67%
1999	14,970,100	15,654,950	684,850	4.37%	7.31%

Source: National Retail Federation

"Granted, the bulk of holiday hiring is usually recorded in November, but the October figure often provides a good clue of how retailers perceive hiring needs for the season," said Chief Executive John Challenger. "If previous years are any indication, we could still see 300,000 to 350,000 new retail jobs added in November. Anything less than 300,000 new jobs would be a sure sign that retailers consider this year an absolute bust – hiring extra workers would not only strip away meager profits, but it would be unnecessary based on low customer traffic."

Lowered Earnings Forecasts

Even worse, department stores Macy’s, J.C. Penney, and Kohl’s and specialty retailer Williams-Sonoma all have lowered their earnings forecasts in recent days.

These downward revisions, which follow on the heels of two-straight months of weak monthly chain-store sales results, have certainly stoked the concerns about this holiday season.

"It is always a little bit dangerous to focus on one retailer or even one sector," said Julia Coronado, senior U.S. economist at Barclays Capital. She recalled that last year investors feared weak department store sales would translate into soft holiday sales, only to discover that consumers bought record numbers of flat-screen televisions.

The trends also may not be all that surprising given the climate we are in right now. Several industry analysts said they expect mid-tier department stores will continue to see the weak sales because whenever middle-income consumers are feeling pinched, they are likely to trade down to discount retailers such as Wal-Mart. Meanwhile, affluent consumers are less likely to fell the current pressures and will likely continue to shop at high-end stores such as Nordstrom and Saks.

One sign that this may indeed be playing out is that Wal-Mart continues to forecast a strong holiday season.

Wal-Mart may be playing its cards just right for this year’s holiday shopper. The world’s largest retailer began its price discounts early and is offering consumer-friendly services such as the ability to order products online and pick them up at the store without shipping and handling charges.

"What it did was send a message that Wal-Mart’s value proposition is about low prices," said Bill Marquard, a former consultant to Wal-Mart who recently published a book called "Wal-Smart: What It Really Takes to Profit in a Wal-Mart World." He expects these strategies will help improve traffic at Wal-Mart.

"I really see Target and Wal-Mart being the big winners this year," he said.

Christina Cheddar Berk is a News Editor at CNBC.com. She can be reached at .

© 2008 CNBC.com

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