A Chorus Of `Humbug' This Holiday Season

Store markdowns during the holiday season have become as commonplace as mistletoe and fruitcake. With consumers apparently losing interest in shopping in October, however, Christmas 1995 could prove to be especially hard for retailers.

The holidays are critical for retailers because they account for roughly a third of annual sales and half of the year's profits. Judging by indications so far, households are approaching the holidays cautiously (chart), and items that are not discounted will get left on the shelf. That could be bad news for many companies, who are already cash-strapped amid some of the toughest times in retailing history.

Retailers are not the only ones with a stake in holiday shopping. The level of activity in store aisles will also affect manufacturers, not to mention the outlook for inflation--a trend dear to the hearts of policy makers at the Federal Reserve. Right now, sluggish consumer demand and hints of excess inventories are crimping factory activity and setting up conditions for holiday discounting that will keep inflation tame.

Altogether, the latest data suggest that the economy is struggling to grow above 2% this quarter. But coming after the 4.2% annual rate of increase in the third quarter, the economy's strains are not enough to push the Fed to lower interest rates--not yet.

The central bank kept the federal funds rate at 5.75% at its policy meeting on Nov. 15. The Fed's inaction, however, reflected its wait-and-see attitude toward the budget snafu in Washington. Key Fed members have said repeatedly that credible deficit reduction must come before rate cuts. The Fed meets next on Dec. 19.

WITH LUCK, the federal government will be back to work by then. Not only are some October economic reports being delayed, but data collection for November reports, due out in December, is also on hold. That could affect the quality and timing of those data as well.

Still, the Fed will keep an eye on the recent sluggishness in consumer spending, which accounts for two-thirds of the economy. What is clear from recent surveys on holiday shopping plans is that gift budgets are fairly modest this year.

One closely followed survey shows that consumers are planning to spend 4% less this year than in 1994, according to a query of 1,000 shoppers by Deloitte & Touche. That works out to $685 per household, on average, nationwide. Households in the South are cutting back the most, says D&T, with spending plans down 8%.

Why the ho-hum expectations? Some consumers are growing uneasy about job prospects. Jobless claims have been rising in recent weeks. Others took on massive amounts of debt over the past year. Repaying those loans is eating up a big chunk of incomes: A rising percentage of credit-card and mortgage debt is already delinquent.

The D&T survey of 500 retailers found that companies had brighter expectations for holiday buying than did households. However, a weak October may have dashed some of that optimism. Retail sales fell 0.2% in the month, and excluding autos, they were down 0.5%. Department stores and apparel vendors took the biggest hits.

THE OCTOBER PERFORMANCE says a lot about this quarter's consumer outlook--and it isn't good. In the past three years, fourth-quarter real retail sales have grown at an annual rate of about 10%, and in each year, the quarter's biggest gain occurred in October. This year, the October data indicate that retail volume started the fourth quarter up less than 1% above its third-quarter average.

November may be better than October for retailers. The D&T survey found that 28% of consumers plan to start their holiday shopping before Thanksgiving. And the Johnson Redbook Report says that sales at department and chain stores in the first two weeks of November were up a solid 2.2% from October.

The D&T retailer survey also found that stores hoped to keep holiday sales promotions to a minimum. But that's probably wishful thinking. Shoppers will do just what they did last year: Sit home watching It's a Wonderful Life--and waiting for bargains. That will force retailers to mark down merchandise.

That's why inflation could end the year lower than it was this past spring. Consumer prices for all items rose 0.3% in October, as did the core index, which excludes food and energy. Consumer inflation is on track to rise about 2.7% in 1995, about the same as 1994's 2.6% rate.

The prices for goods alone are up only 1.7% over the past year. That low pace is a big reason why the profit margins of so many retailers are suffering (chart, page 33). Before this summer, producer prices of consumer goods excluding food and energy--the cost to retailers for their merchandise--were increasing at a slower pace than were the prices that were paid by consumers.

Now, prices of consumer goods have slowed so much that producer prices of goods headed to retailers are rising faster than consumer prices. In the fourth quarter, the gap could be as wide as one percentage point. That will squeeze store margins even more. Moreover, stores are likely to cut back on their ordering next year, forcing cutbacks in factory output.

INDUSTRIAL PRODUCTION already looks pretty soft. Output in manufacturing, mining, and utilities fell 0.3% in October, after edging up 0.1% in September. The October weakness was exaggerated by the machinists' strike at Boeing Co., which by itself subtracted 0.2 percentage points from the month's output.

Even so, other industries also cut production, especially consumer goods. Automobiles and trucks accounted for half of the 0.5% drop in output of consumer goods, but other consumer durables, along with clothing and energy products, appear on the weak side as well.

As a result, operating rates in all industry eased lower in October, falling to 83.6% from 84.1% in September. The rate in manufacturing dipped to 82.8% from 83.3%. Utilization rates are well below their recent peaks (chart). That's another sign that there is little, if any, upward pressure on goods prices.

October's output weakness may well reflect surplus inventories in parts of the economy that will need to be worked off in the fourth quarter. Because of the government shutdown, however, the Commerce Dept. did not release its report on September business inventories as scheduled, but it has already said that manufacturing stock levels rose excessively in the month.

For now, it's not clear how heavy retail inventories were at the start of the holiday season. If stock levels are lean, then the need to discount will be less severe. If, however, stores head into the new year awash in unsold goods, the inventory adjustment could stretch into early 1996. That's why holiday sales this year are especially important, not only for retailers, but for the economy.

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