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A More Joyous Scenario for Holiday Sales

By Rick MacDonald The holiday shopping season kicks off Thanksgiving weekend, and it may not be a very happy one for retailers. The primary culprit is deteriorating consumer fundamentals, which have worsened following the September 11 terrorist attacks.

Just how dismal is the outlook? A September survey of 50 leading retail and real-estate analysts by industry group International Council of Shopping Centers (ICSC) gives some indication. Half of the respondents expect the season to be characterized as "disappointing." The survey breaks down responses into two categories -- those given before September 11 and those given after. Pre-attack answers indicate a median holiday sales rise of 2.5%, while post-attack projections are for a median gain of just 0.5%.

Things may not be as bad as the survey suggests, however. The October retail sales report, which was released on Nov. 14, shocked Wall Street economists with a record 7.1% jump. The data imply that consumers have remained surprisingly resilient, which could mean that holiday sales will top Wall Street's depressed expectations.

BETTER WEATHER. Indeed, there are a number of reasons to have faith in such a scenario. Consumers have a lot of extra money available to spend, thanks to falling interest rates, tax relief, mortgage refinancing, and lower energy prices. And dollars not being spent in other areas of the economy, such as travel, could be spent on holiday buying. The stock market's gain over the past few weeks could also be a boon.

Retail sales figures for 2000 were depressed not only by the economy's sudden deterioration late in the year but also by severe winter weather. So far, it has been warmer and drier than last year. If it stays that way, shoppers might be more inclined to get out. And they'll have plenty of time to do so. Thanksgiving falls as early as possible this year, creating the maximum number of shopping days -- 32 -- between it and Christmas.

Who will perform the best this holiday season? Several surveys indicate that the tough economy means price-conscious consumers will need incentives, such as sales and special values, to lure them into the stores. The likely result is continuing strong results for large discount chains. Home- and entertainment-oriented products are expected to be big sellers.

CRUSHED CONFIDENCE. Granted, the backdrop for consumers is much worse than it was a year ago. October's 5.4% unemployment rate is 1.5 percentage points higher than the 3.9% for the same month last year -- which was the lowest in a generation. And wage growth has slowed. Hourly earnings are rising at a year-over-year rate of 3.8%, vs. 4.2% a year ago.

Consumer confidence has taken a huge hit, with the October reading from the widely followed University of Michigan index off more than 23 points from the year-earlier level. More alarming is the 50-point drop in the Conference Board's reading on sentiment from last year. Both measures are now near their low points since 1993. Lingering uncertainty surrounding job prospects, bonuses, and pay raises could make for less-than-jolly holiday sales.

In the next few weeks, though, consumers may again surprise the experts and open their wallets wide. And that would be the nicest gift of all for retailers and the U.S. economy. MacDonald is senior economist for Standard & Poor's Global Markets

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