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Holiday Sales: Just How Bad?

Action Economics says this could be the gloomiest holiday season in decades for the retail industry

Somewhere, the Grinch is smiling. This holiday shopping season—specifically, the combined months of November and December—will likely produce worse year-over-year retail sales and consumer spending figures than the ugly 1991 season, with projected declines that lie in striking distance of prior 1980 and 1974 lows. Falling gasoline prices, which may allow consumers to divert money to other purchases, may provide some cushion to Christmas retailers, but likely not enough to keep this from being the ugliest sales season in decades.

We at Action Economics forecast that the combined November-December U.S. retail sales figures should post big year-over-year declines of 6.5% overall and 2.7% excluding autos this holiday season, following consistent 4% to 8% gains in each year since 2002, and a steady string of positive growth figures since the start of the data set in 1992.

Meanwhile, nominal and real (inflation-adjusted) figures for personal consumption expenditures (PCE), a gauge of consumer spending, which are less volatile given inclusion of the relatively stable services sector, should show near-flat year-over-year readings this year following a pattern of positive growth in each year back to the 1991 recession. Even if we exclude the comatose vehicle sector from the consumption figures, we still expect only a 1.2% year-over-year real gain in 2008 that should prove the weakest since the same 1.2% gain in 1991.

As for the holiday season, we expect nominal PCE to rise just 0.6% from the prior-year two-month period. This would mark the weakest holiday sales reading in the history of the monthly PCE series, which dates back to 1959. For the full fourth quarter, if we look at year-over-year real consumption back to 1960, the 0.2% drop we project this year is worse than the 0.8% gains in both 1990 and 1991, and even below the zero and 0.1% figures seen in the nasty years of 1980 and 1981. The only worse performance in this measure was the -1.5% reading in 1974, which reflected the substantial impact of the 1973 Arab-Israeli war and OPEC oil embargo on public confidence in the economy.

The big nominal sales drops this time around reflect plummeting prices as well as falling real sales, so the big nominal drops may overstate the hard luck falling on department stores and other holiday retailers. Yet, the sharp declines in the various "real" measures are also impressive, and should account for the worst retail shopping season in the careers of most financial market participants.

Holiday Sales Forecasts

Some of the more prominent retail holiday sales forecasts show a significant drop in sales growth, though these forecasts are all notably cautious relative to sales trends over the last few months. Indeed, two out of three forecasts discussed below were issued in mid-September, and so predate the sharp deterioration in the economy that has occurred since that time.

The International Council of Shopping Centers (ICSC) expects growth of 1.0% for the traditional holiday season (November and December) from chain stores. This compares with 2.1% in 2007, 2.9% in 2006, and 3.6% in 2005. Note that this forecast would still have sales outpace the 0.5% gain posted in 2002.

The National Retail Federation (NRF) expects total holiday retail sales of 2.2%, which marks the lowest tally since 2002, when sales rose 1.3%. Note that this forecast was issued Sept. 23—predating most of the downturn.

Retail Forward expects holiday sales growth of 1.5% compared with 2.7% in 2007, 3.8% in 2006, and 7.0% in 2005. Growth is expected to be the weakest since 1991, with this forecast also issued in mid-September.

Key Story Lines for the Season

As the ICSC indicated in its holiday sales forecast, consumers this season will be characterized as more frugal, practical, and reserved than in recent years. Consumers will be assumed to be worried about jobs, retirement savings, and housing values, and will target lower price points.

Stores will push discounts early and aggressively to try to shore up sales early in the season. As such, we would not be surprised to hear the usual news of stronger-than-expected Thanksgiving weekend results.

Aggressive discounting may imply downside risk for various core inflation measures, but should provide support for "real" spending.

Online shopping should continue to grow. Research outfit Forrester expects online retail sales to approach $44 billion during November and December, which represents a 12% gain over the year. While this would mark the slowest rate of growth since inception, it still would significantly outpace the brick-and-mortar sales rate.

Consumers have initiated a powerful pullback in spending relative to income just as we are entering the holiday season, with deleveraging efforts that are well gauged by the free fall in stock prices and the collapse in various consumer confidence measures despite the usual boost associated with falling gasoline prices. All the various year-over-year sales measures will challenge or surpass 1991 lows, with various measures also taking at run at troughs set in 1980 and 1974, which were arguably the worst two years for holiday spending since World War II. Businesses are likely also deleveraging rapidly, with an associated blow to the labor market that is likely fanning household pessimism.

In total, retailers face a hostile backdrop for holiday sales, though we have yet to see exactly which records will be broken as we pass through the worst shopping season in decades.

MacDonald is director of investment research and analysis for Action Economics.

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