Strong outlook for holiday retail

The US economy is about to get its largest jolt of the year: the annual holiday buying blitz that ends 31 days from Friday.

By the time all the wrapping paper is discarded, Americans will spend $676 per household, for an estimated total of $251 billion, according to one survey – an amount more than the annual gross domestic product of Chile and Israel combined.

The nation's holiday spending, even adjusted for inflation, sets a record every year, and this year will be no exception. Surveys and analysts predict holiday spending will rise about 5 to 6 percent over last year, which was 6.1 percent higher than 2004. If this level of spending prevails, it will give merchants – and the economy as a whole – a solid foundation going into 2007.

"There will be a lot of cash flowing in the next six weeks," says Gregory Miller, chief economist at SunTrust Banks in Atlanta. "If holiday sales come in at 6 percent [higher], then the first quarter starts off better than it would otherwise."

Americans will be entering the holiday period with enough cash in their pockets, or room on their credit cards, to happily hit the malls, some economists and retail experts say. "Every month this year, all the way back to last October, there has been an increase in real disposable income," says Richard Feinberg, a researcher at the Purdue Retail Institute in West Lafayette, Ind.

However, Mr. Miller thinks that debt levels have now risen to the point where it will eat into consumers' ability to spend for the holidays. Some credit-card companies are now requiring higher minimum payments at the same time as banks are setting the interest rate on adjustable-rate mortgages higher, he notes. "My concern is the cumulative damage to consumers' balance sheets," says Miller, who expects holiday sales to increase by only 3 to 4 percent.

Other holiday sales analysts are more sanguine. Jay McIntosh, Americas director of consumer products for Ernst & Young LLP in Chicago, points to the 4.4 percent unemployment rate, the lowest level in five years. In addition, the stock market is hitting new highs, creating a feeling of wealth for some that should help the luxury and high-end stores, he says.

"The question is how much of an effect is the slowdown in housing going to have for the holiday season," he says. On a year-to-date basis, retail sales have been growing at about an 8 percent pace. But the chill in housing will result in holiday spending growing by 6.5 percent, he estimates. "Our projection is that [housing is] not going to be a major negative, but it could hurt retail sales in 2007."

Although gasoline prices have dipped, it's not clear that will translate into better sales at the mall. "Higher prices did not hurt as much as expected, so lower prices may not help as much," says Mr. McIntosh.

In the past, higher energy prices have helped push some Americans to spend more time shopping on the Internet. This year is expected to be no exception as consumers become more comfortable with buying online. A survey released this week by MasterCard Worldwide found that the average consumer planned to spend $300 online this season out of total spending of $700.

Business is already brisk at Ty's Toy Box, says Ty Simpson, president of the online toy company. "We're seeing people shop earlier than before, which makes us feel good about what we're seeing," says Mr. Simpson, who has already sold out of some products related to the Doodlebops, a cartoon rock band.

Retail analysts expect gift cards will continue to grow in popularity this holiday period, in large part because they will be heavily promoted by retailers. Gift cards help to cut down on returns, and consumers tend to spend more than the amount of the card. The MasterCard survey found 60 percent of consumers plan on buying gift cards or gift certificates.

They're certainly part of the strategy at eFashion Solutions, which markets apparel for such labels as Baby Phat and Rocawear. "The cards help out our January business: They actually bring in an extra 10 percent. January is a key month for moving whatever is left over from the holidays," says Justin Schaldone, director of marketing in Secaucus, N.J.

Like many other retailers, Mr. Schaldone also plans on trying to stimulate consumers with sales and promotions. "We're giving 10 percent off if you spend $200 or more on certain items," he says.

But some items won't need promotion: They are already in short supply. The big hit, says McIntosh, is Sony's PlayStation 3.

The huge holiday spending is far from unique to the US. Last year, the International Council of Shopping Centers (ICSC) estimated that Canadians would spend US$550 per household for the holiday season and Mexicans would spend $251.

However, neither Mexico nor Canada celebrates Thanksgiving on the fourth Thursday in November, and consequently neither has a "Black Friday" shopping day afterward. "There is just a different pattern to their holiday season," says Patrice Duker, a spokeswoman for ICSC.