December retail sales dip with outlook weak for 2008

The economy is not getting much help from the consumer.

Instead, economists see signs that Americans are starting to become much more cautious about spending as they worry about their jobs, the rising price of energy, and the falling values of their homes.

If consumers continue to slow their spending, economists believe the economy will move into a recession – the first economic downturn in about six years. A consumer pullback may well prompt the Federal Reserve to be even more aggressive in cutting interest rates, which makes it less expensive for people to borrow money. In addition, retail experts are urging department stores to begin major promotions to get consumers back in the spending mode.

On Tuesday, consumer reticence was in evidence when the Commerce Department reported that December retail sales fell by 0.4 percent from November's level. At the same time, the International Council of Shopping Centers reported that sales at chain stores fell 0.9 percent for the week ending Jan. 12, compared with the previous week. The National Retail Federation also lowered its estimate of holiday sales growth to 3 percent, the slowest pace since 2002.

"Consumers are on the verge of packing it in, which means recession," says Mark Zandi, chief economist at Moody's Economy.com.

Consumer spending represents almost 70 percent of the US gross domestic product, so any consumer slowing will show up in America's economic performance. The darkening mood is spreading to the boardroom as well. On Tuesday, the Conference Board reported that its index of CEO confidence fell in the fourth quarter to its lowest level since 2000.

Their mood was not helped by news on Tuesday that wholesale inflation (the producer price index) rose by 6.3 percent last year, the largest increase in 26 years. "But in December, it does look to be moderating under the weight of the moderating economy," says Mr. Zandi. In December, the PPI fell 0.1 percent.

However, the focus of economists is likely to remain on the consumer.

On Monday, at the annual convention of the National Retail Federation (NRF) in New York, economist Rosalind Wells described her economic outlook as "guarded."

Slow economic growth means that retail sales will increase by 3.5 percent for the year, said Ms. Wells. This would be the lowest rate since 2002. "We expect consumers' spending to moderate since they are facing several economic head winds," she said at a press conference.

On Tuesday, she said that retailers "will have to quickly adapt with pricing strategies and promotions that will encourage consumers to spend."

The second half of the year may benefit from a congressional stimulus package. This might be some form of a one-week national sales-tax holiday, or a tax cut, said Steve Pfister, NRF's senior vice president for government relations. Any help, he said in an interview, should provide a needed "psychological boost," since it sends the message to consumers "that my government cares."

The forecasts are making many of NRF's exhibitors nervous. "We are going into the new year with our eyes wide open," says Douglas Fox, director of investor relations for Zebra Technologies, a producer of printers in Vernon Hills, Ill.

One plus, Mr. Fox says, is the export market, since 50 percent of Zebra's sales are international. "The economies are still strong in Asia and Eastern Europe," he says.

Some of the companies at the NRF convention are trying to position themselves as having products that will help businesses save money if the economy turns down. One company, JobApp Network, says it can streamline the hiring of hourly workers. The company uses the phone and Internet to screen and score future employees.

"You can save money if you can reduce turnover," says Blake Helppie, chairman of the Troy, Mich., company.

Another business, Empathica, based in Toronto, says it can help companies quickly measure what their customers want. It measures customer loyalty and shows firms how to "rescue" a client who has had a bad experience.

The service is meeting with good results, says John Than of Empathica. "We have not felt the pinch yet," says Mr. Than, who says sales doubled last year and the company is hoping for the same this year.