By Vicki Needham - 11/26/10 11:00 AM EST
After two dismal years, retail sales this holiday season could deliver
good cheer to merchants while providing a boost to the 2011 economy.
Holiday retail sales are expected to increase between 2.3 and 3.2 percent, according to various estimates, a vast improvement over last year's 0.4 percent rise and the joyless 3.9 percent decline in 2008 during the financial crisis as the recession entered its first year.
The boost wouldn't just be good news for stores, but for President Obama's efforts to jump-start the economy in the face of stagnant 9.6 percent unemployment.
The good retail season would also come as Congress wrangles over an extension of the Bush-era tax cuts, with Republicans arguing that extending tax cuts for upper-income brackets would encourage the top earners to spend into the economy -- and forecasts showing that the wealthiest are spending while the lower-income brackets are saving.
The forecast on upper-income level shoppers spending also could provide Democrats with another argument against extending the tax cuts for those in the upper tax brackets, who are willing to spend despite the uncertainty of tax-cut legislation.
The White House and a majority of Democrats are intent on permanently extending the tax cuts for middle-class taxpayers while allowing the other breaks to expire for those making more than $250,000 a year, a group Republicans call the job-creators.
Senate Majority Leader Harry Reid (D-Nev.) has announced his intention to vote on several middle-class tax cut bills after Congress returns next week. Republicans have said the votes will merely waste valuable time in putting together a compromise that can be passed by both chambers and signed by President Obama.
"The economy is clearly improving and retail sales are an indication of that," said Bob Duffy, FTI Consulting's retail industry leader, a group that evaluates retail trends. "But to get back to pre-recessionary levels we need a number of years of growth like this to get there."
The economy may get an extra boost from holiday spending if lawmakers can reach an accord before Christmas, Duffy said.
tax cuts are preserved for high income earners in some form, a scenario
looking more possible following the mid-term election results, there
could be some extra goodies under the Christmas tree, as most high
income households have been prepared for a tax hike next year," an FTI
report said. "The timing of an across-the-board extension of some sort,
if it occurs, would be most fortuitous for upscale retailers. On the
other hand, those families making under $250,000 have assumed all along
that the Bush tax cuts would be extended for them so a favorable
resolution won’t seem like found money."
While consumers are expected to hit the stores again, the uptick in holiday sales -- 2.5 percent is the 10-year average -- is still well behind the peak of 5-6 percent between 2003 and 2006 before the recession started in December 2007.
The National Retail Federation (NRF) has forecast that holiday sales will increase 2.3 percent, the most in several years.
"Though the retail industry is on stronger footing than last year, companies are closely watching key economic indicators like employment and consumer confidence before getting too optimistic that the recession is behind them," said NRF President and chief executive Matthew Shay.
ShopperTrak estimates overall holiday sales will improve 3.2 percent compared with last year and has recently upped its forecasts to account for better consumer sentiment.
The Consumer Federation of America (CFA) and the Credit Union National Association (CUNA) estimates a 2.5 percent increase with 23 percent of respondents in a poll saying their financial situation is better this year with 10 percent saying they would increase their holiday spending this year, an improvement of 8 percent from last year. Fewer also said they would decrease their spending, 41 percent in 2010 versus 43 percent last year.
“While these results convince us that holiday spending will increase this year – elements of our survey also underline the fact many consumers continue to harbor significant concerns about the economy and their personal finances,” said Mike Schenk, CUNA senior economist.
Estimating a 3 percent increase, FTI's report is slightly more optimistic -- the group showed an overall 1.6 percent increase in 2009 after predicting a 2 percent drop two year ago, with sales this year driven mostly by improving income growth and household wealth compared to last year.
Duffy called retailers "cautiously optimistic" on this year's sales and merchants weren't taking chances on lackluster results with many such as Wal-Mart and Sears staying open on Thanksgiving Day and offering sales ahead of Black Friday and extended deals through the weekend, in-store and online.
"The encouraging news for merchants is that they know exactly what they’re up against and are planning accordingly," the FTI report said. "After nearly two years of adjusting to the new normal, retailers understand the mindset of their customers and what motivates them to buy in these uncertain times.
"Promotions are unavoidable but can be implemented in a methodical way that avoids the desperate last-minute markdowns that killed the 2008 season."
A recent NRF survey reported that 138 million people are planning to shop on Black Friday, up from 134 million that had planned on it last year. Approximately 60 million people say they will definitely hit the stores while another 78 million are waiting to see if the bargains are worth braving the cold and the crowds, according to the survey.
"The rules for Black Friday have changed significantly,” said NRF President and chief executive Matthew Shay. “Instead of waiting until Thanksgiving Day to announce their promotions, many retailers are getting shoppers excited about Black Friday by offering sneak peeks of deals in advance, using social media to create buzz, or teasing upcoming deals on their websites.”
This year's increase is expected to be driven by a small piece of the population -- the top 30 percent of wage earners -- who've primarily benefited from the improving financial markets, according to the FTI report.
"We think it’s likely—that renewed spending by affluent, near-affluent and merely well-off households is more than offsetting depressed spending by the bottom 40 percent in 2010, whose economic woes mostly dominate the news headlines," the FTI report said.
So the key to accelerating the pace of the economic recovery from the holidays and into next year is the re-engagement of the lowest 40 percent of wage earners, Duffy said.
For that to happen, the housing market has to show improvement along with gains in job creation, and getting a greater portion of that remaining 70 percent spending again, where personal wealth has mostly been derived from now depleted home equity, Duffy said.
Real estate has been plagued by foreclosures and other economic factors such as persistently high unemployment and underemployment have all affected consumer spending, which accounts for 70 percent of the economy, he said.
In overall spending, the top 20 percent of earners account for between 40-45 percent of all discretionary spending, twice as much as those who make much less, according to Labor Department statistics. The middle 40 percent of wage earners account for 35 percent of all spending while the bottom 40 percent only 20 to 25 percent, FTI said.
Those in lower income brackets are still saving -- the personal savings rate has been above 5 percent for eight straight quarters -- and continue to restrain their spending while unemployment is high.
Some economic indicators are showing better-than-expected results with the economy grew faster -- at a 2.5 percent rate -- than the first estimate of 2 percent, driven primarily by an increase in consumer spending, which likely bottomed out last summer.
Also, wages and salaries nearly doubled in the second quarter, personal income was up 0.5 percent in October and consumer spending was up 0.4 percent last month, all positive indicators for the economy with the arrival of the holidays.
Consumers plan to spend more with a Gallup poll showing that average consumers anticipate spending $714 on holiday gifts this year, compared with $638 last year. That's less than consumers spent during the peak year but it could help propel retailers into 2011 with positive results.
With a solid increase in holiday spending the indicators could combine to provide a headwind for 2011.