Santa's Gift To Retailers?

Notwithstanding the economy's robust 4.2% growth rate last quarter, the omens point to a bleak Christmas. Not only were back-to-school sales weak this fall, but reports of credit-card delinquencies are growing, and many major retailers say demand remains weak.

Economist David Hale of Kemper Financial Services Inc., however, thinks there's still a fair chance that anticipation of a capital-gains tax cut will boost consumer demand as Christmas approaches. Since January, he notes, the value of equities held by U.S. households has risen by more than a trillion dollars.

Over time, such appreciation tends to stimulate consumption through a wealth effect--that is, people who feel richer tend to loosen their purse strings. But the pickup is often diffuse and delayed. What may accelerate and strengthen the effect this time around, argues Hale, is the possibility that the President and the GOP-led Congress may soon agree on a capital-gains tax cut that would be effective late this year.

"If that happens," he says, "households are likely to take some capital gains and spend part of the proceeds on last-minute holiday shopping."

In such a scenario, more affluent households would lead the way. One reason retail sales were soft in the spring was that many high-income households were hit with deferred tax bills resulting from the tax hike passed in 1993. Now, such households will be able to realize appreciably larger after-tax capital gains.

And it's not only the superrich who will benefit. The New York Stock Exchange reports that in 1990, some 8.9 million out of 51 million individual shareholders had equity portfolios above $50,000. Since stock prices have doubled since then, Hale figures that the number of households with equity holdings over $100,000 now exceeds 12 million. And that doesn't count huge household equity investments via mutual funds or pension vehicles such as 401(k)s.

Even if the wealth effect doesn't materialize before Christmas, says Hale, it could well prove the key to sustained economic growth next year.

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