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With consumers skittish, hopes muted for holiday sales

By Ylan Q. Mui
Washington Post Staff Writer
Saturday, October 2, 2010; A9

Consumer spending has stalled along with the economic recovery, new data show, muting expectations for the critical holiday shopping season.

The Commerce Department reported Friday that spending rose a modest 0.2 percent in August from the previous month when adjusted for inflation - well below last year's August gains. In addition, economists say the increase was boosted by the federal government's temporary extension of unemployment benefits, which also padded incomes and savings.

The feeble appetite of shoppers is one of several factors holding back the economic recovery. The stubborn unemployment rate and continued fallout in home prices have not only taken their own toll on the nation's financial health, but they also have consumers cautious, keeping their wallets in their pockets.

A monthly survey by the University of Michigan/Reuters that was released Friday showed consumer sentiment dipped in September, dropping seven-tenths of a point on the index to 68.2. That falloff was driven by declines in long-term expectations, even though consumers recognized that their current situations had improved since the depths of the recession.

"I think the consumer is a little better off. . . . But I don't think they feel better off," said Jeff Kleintop, chief market strategist for LPL Financial.

Personal incomes rose 0.2 percent in August when adjusted for inflation, while the savings rate ticked up to 5.8 percent. Most of the spending increase came from a 0.8 percent jump in purchases of nondurable goods, such as clothes and food. August also enjoyed one-time bumps from back-to-school shopping and sales tax holidays in several states.

Early data indicate that shoppers moderated their spending again in September. Consumers reported spending an average of $59 a day last month, according to Gallup research released this week. The amount matches the year's previous low and is significantly less than the $99 a month shoppers reported spending in September 2008, at the start of the financial crisis.

"They are more uncertain and less hopeful about the future since the economic recovery is being drawn out and there does not seem to be much hope on the horizon for a robust recovery," said Chris Christopher Jr., senior principal economist for IHS Global Insight.

That is setting the stage for a lackluster holiday season, a crucial period because it can make up as much as half of a retailer's sales. Even some of the most optimistic holiday forecasts acknowledge that the results could look weak compared with the more robust consumer spending early this year.

Kantar Retail senior economist Frank Badillo estimates that holiday sales will rise 2.5 percent, which would make it the best performance since 2006. Still, it would represent a slowdown from the nearly 6 percent gains in retail sales during the second quarter of the year.

Badillo said consumers were buoyed during the first half of the year by the economic stimulus package, which is now being phased out. Shoppers also gave in to pent-up demand after months of frugality, replacing worn-out items and buying new clothes.

"Expectations of the recovery got a little bit ahead of itself," Badillo said. "The recovery just wasn't strong enough to support that and I think there's been some disappointment."

Value-conscious shoppers are not only spending less, but they also are fueling fierce competition among stores to offer the best deals. Lower prices could end up weighing down overall sales, Badillo added.

Still, there are likely to be a few bright spots this holiday season. Online retail sales have fared better than their bricks-and-mortar counterparts throughout the economic downturn, and industry experts predict that trend will continue through the holidays. A recent Nielsen survey predicted there could be surprising strength in categories such as electronics, gift cards, even vacations, particularly among higher-income households.

"The picture I don't want to paint here is a holiday season that's doom and gloom," said James Russo, vice president of global consumer insights for Nielsen.

The tough economy did not deter former attorney Julia Farr from opening a women's clothing boutique in the District's Friendship Heights neighborhood late this summer. The store, named after her, caters to an upscale customer with $55 T-shirts and jewelry and evening dresses that can cost $1,200 or more.

Farr said business has been steady since she opened but picked up more recently. She said many of her customers are seeking versatile clothes that they can wear at several events, day or night. She kept that in mind as she stocked her store for the holiday season, focusing on dresses in part because customers view them as a better deal than buying a separate top and bottom.

Farr said she knows her customers are paying a premium for her merchandise and has tried to add value to the experience through customer service: All alterations are free, and she'll even create a custom-sewn outfit.

"I understood the economy, but I also thought if I had a boutique that was very focused on service . . . there's more value," Farr said. "I think women need that."

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