Experts: Dire holiday shopping season likely

Retail sales are expected to weaken as the effects of rebate checks wear off.

NEW YORK (AP) — The holiday shopping season is still months away, but already a growing number of economists are predicting that it could even be worse than last year — which is to say, disastrous.

Soaring gas and food prices, a slumping housing market and a falling stock market have depressed consumer confidence, raising fears that shoppers will pull back even more in the critical months ahead.

With consumer spending accounting for two-thirds of U.S. economic activity, the economy’s health is at stake. While Americans have cut back on nonessentials such as clothing, spending has remained fairly resilient despite their darkening mood. But analysts worry that once the short-term benefits of the federal stimulus checks fade, shoppers will retrench further — possibly tipping the economy into a recession.

“It makes us nervous,” said Deanna Zammit, a Brooklyn resident, citing all the bad economic news. The freelance writer, who purchased a condo a year ago in Brooklyn with husband John Miller, a product designer at an Internet software firm, said they are secure in their jobs, but the slowing economy and inflationary pressures have forced them to pare down.

“I’m not going shopping at Macy’s, and I am not buying any more summer clothes,” Zammit said. “Food and gas prices are stinging us, and I am watching where things go.”

A pair of downbeat reports released recently — one on consumer confidence, the other on the housing market — show shoppers are under increasing strain. The Conference Board’s Confidence Index fell for the sixth month in a row to the lowest level in 16 years, while the measure that assesses how consumers feel about the economy over the next six months dropped to the lowest point since the private research group began doing the surveys in 1967. Shoppers are so anxious that fewer people plan to buy big-ticket items like TVs and appliances, according to the Conference Board report — a bad omen for Christmas giving.

Another set of reports — the Standard Poor’s/Case-Shiller home price indices and the Office of Federal Housing Enterprise Oversight index — showed record year-over-year drops in April, a signal that the housing slump is not only deepening, but encompassing markets that were once holding their own.

Meanwhile, American Express warned Wednesday that consumer credit is worsening faster than it had anticipated in June as the U.S. economy continues to falter.

“People are feeling poorer and that means less spending. ... The holiday season will be bad — if not worse than the last year,” said Bernard Baumohl, managing director and chief global economist at The Economic Outlook Group LLC.

Baumohl added that while consumer confidence and spending don’t move in tandem on a month-to-month basis, he believes that the persistent and precipitous fall in confidence will affect spending within three to nine months.

“We are concerned about spending in the second half,” agreed Frank Badillo, senior retail economist at consulting company Retail Forward. He noted that excluding the benefits from rebate checks, he expects sales to be weaker in coming months. If job conditions worsen, he said, the total holiday sales growth could be below last year’s level, which according to the National Retail Federation was the weakest growth since 2002.

After struggling with sluggish sales last year, stores started seeing a boost in recent weeks from the rebate checks — but those benefits are expected to evaporate. Nationwide, sales at stores open at least a year are expected to be up 2 percent to 3 percent in June, after rising a better-than-expected 3 percent in May.

Lynn Franco, director of the Conference Board’s Consumer Research Center, said the holiday period doesn’t “look too good” at this time. “There will be a lot of heavy incentives” to get people to shop, she said.

At Starbucks Coffee Co., which has seen customers make fewer latte trips, one million customers have signed up for the company’s rewards card launched in April, said Brad Stevens, vice president of customer relationship management — indicating that shoppers are looking for a good deal. He expects to enhance the card’s offerings for the holidays.

Still, such incentives may not be enough to save the industry’s holiday season. Despite aggressive discounting last year, same-store sales for the November-December period rose a modest 2.2 percent, the weakest holiday period growth since 2002.

Reacting to the malaise, retailers are paring back expansion plans and closing stores. J.C. Penney Co. announced Wednesday that it will open 20 new or relocated stores in 2009, down from 36 announced in April. It had previously planned to open 50 new stores each year through 2011.

Shoppers should also expect to see more focused holiday offerings as stores cut back on inventory. Dan Hess, founder and CEO of research firm Merchant Forecast, estimates that retailers are paring back autumn orders by 15 percent from a year ago.

“I think [shoppers] are going to be way more selective than last year,” said analyst Jennifer Black.

While it’s too early for most shoppers to have holiday shopping budgets, some consumers are already expecting they’ll be more frugal.

Zammit said she may scale back on the number of gifts she gets for her entire family, except for people like her parents.

Kara Flynn, 25, of Milwaukee, said she will probably cut back on the edible treats she bought family members from grocery chain Trader Joe’s last year.

“I’m probably going to think twice about what I’m going to get them,” she said.