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

"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.

Holiday Retail Sales 1997-2007

Holiday Retail Sales (in billions)
Annual Retail Industry Sales (in billions)
Holiday Sales as a % of Industry Sales
2006 $456.20 $2,328.21 19.59%
2005 $436.15 $2,187.45 19.94%
2004 $410.33 $2,065.36 19.87%
2003 $387.16 $1,946.79 19.89%
2002 $368.77 $1,873.75 19.68%
2001 $364.12 $1,818.44 20.02%
2000 $352.16 $1,760.53 20.00%
1999 $344.20 $1,678.30 20.51%
Source: National Retail Federation

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.

'Consumers Are Fragile'

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

Amy Sancetta

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

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-Sonomaall 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 She can be reached at