Holiday is on the Way

RAPAPORT… What does the summer economic climate portend for holiday spending? Forecasters see the economy as steady, with a few undercurrents causing some concern. But, overall, expectations for December shopping are for more of the same.

First, the cautionary notes. The Conference Board Consumer Confidence Index, which had bounced back in May, reversed course in June, falling from 108.5 in May to 103.9. Its Present Situation Index decreased to 127.9 from 136.1 in May. The Expectations Index edged down to 87.9 from 90.1. Lynn Franco, director of the Conference Board’s Consumer Research Center, says that a perceived softening of the present-day business and employment conditions were the major reasons for the pullback. And, she says, the Present Situation Index was at a level not seen since the final quarter of last year. Franco tells RDR that the index has been fluctuating and, in fact, is not much below where it was a year ago in June. That said, if the current decline continues and spills over into the fall, it would not bode well for the retail season. However, on the flip side, Franco says, there are other variables that can counter declining consumer confidence. Consumer incentives are one such variable. She points out that shoppers today have become accustomed to bargains and will wait for incentives.

“We have seen seasons past where retailers went into the season feeling the economy was strong and consumers felt like they had plenty of cash and credit and incentives weren’t readily available as in prior years,” says Franco. Lack of incentives did not cause an actual pullback in spending but did seem to mean that those shopping seasons did not have a gangbuster start. Overall, Franco sees no significant change in economic growth.

“If anything, the change is on the positive side,” Franco states. She says that the economy should pick up a little, with about 5 percent growth.

TWO QUESTION MARKS

David Wyss, chief economist for Standard & Poor’s, tells RDR that there are two big question marks when it comes to the economy at the holidays. One is the price of oil and the other is the housing market. Especially in the lower echelons of the economy, money spent at the gas pump is money not spent on Christmas presents, he says. However, someone who owns a Hummer is far less affected by gas prices. A mild winter would also ease pressure on consumers as well. “If it’s a mild winter, even if costs go up, the bill doesn’t,” Wyss says.

The slowing housing market is having an effect — but mainly in sectors closely tied to home sales. Companies selling building materials, home appliances and the new furnishings that new homes require are affected. But money not spent on a new sofa is money freed up to spend on other discretionary items, such as big-screen TVs or jewelry. And, Wyss says, so far the “wealth effect” — consumers feeling wealthier because the value of their homes is up, or less wealthy if the value is down — seems to be having little impact on spending. “Despite falling home prices, we continue to live beyond our means, like good Americans,” says Wyss.

This is where consumer debt comes into play and this is an important number.
“Except for the top 10 percent of the nation, debt is very democratic,” says Wyss (see charts). “Debt service costs are almost flat across the income spectrum. At the high end, it’s mostly mortgages; at the low end, it’s mostly car loans and credit cards. The total debt service cost is very stable in terms of income.”

Americans may not be comfortable with debt, but it doesn’t slow our spending. However, Wyss explains, if interest rates go up, living beyond our means will become more expensive. And that could cause some cutbacks on credit card usage and a reduced willingness to spend. The good news, according to Wyss, is that it doesn’t look as though there will be any changes in short-term interest rates; long-term interest rates are going up slightly, which has more of an impact on housing but less on television sets, clothing and jewelry.

“The Fed has slowed the economy down. I don’t think they want to raise rates any more,” Wyss says of the Federal Reserve. Inflation, a major concern of the Fed, has slowed. “The Fed has said that their interest is to control inflation,” adds Wyss. “It is still at the high end of their comfort zone, so I don’t think they’re going to cut rates, but since it is inside their comfort zone, I don’t think they’re going to raise rates.” Steady interest rates and a steady economy all bode well for holiday shopping.