Outlook is bullish on holiday buying

Economists say spending could grow 6 percent, despite consumer challenges like big energy bills.

It may cost hundreds of dollars more to stay warm this winter. American workers haven't seen much of a pay raise this year. And a record number of consumers have just finished filing for bankruptcy.

But these economic dark clouds are not expected to rain or snow on Americans' holiday spending, which gets off to a well-publicized start Friday.

Economists project that holiday spending will grow a healthy 5 or 6 percent, down slightly from last year, when it grew by 6.7 percent. In fact, with energy prices falling faster than expected, some economists are now revising upward their growth forecasts for the end of 2005. And the annual shopping blitz should be strong enough to provide the economy with momentum into next year.

"The consumers will do their part and ensure the expansion keeps going," says Mark Zandi, chief economist at Moody's Economy.com.

Some of the spending defies economic theory, says Jay McIntosh, director of retail and consumer products at a Chicago branch of the accounting firm Ernst & Young. Yes, Americans will be paying more to stay warm. But, he says, "It's become part of American life to spend heavily on the holidays. It's really more emotional than rational."

Many will be inspired this season by early bargains. Already, many retailers are offering sales they would usually spring on consumers within two weeks of Christmas. Wal-Mart, the nation's largest retailer, has said it will match any other retailer's prices. "On Black Friday, the bottom may fall out," says Richard Feinberg, director of the Purdue University Retail Institute and a professor of consumer sciences. "Retailers are selling more cheaply and sooner than they want to."

The weather may also help retailers. On Wednesday, a brisk cold front dropped temperatures below freezing in the East. Snow began blanketing parts of the Midwest. Retail experts hope this puts consumers in the proper mind-set to begin their holiday buying.

"We think Mother Nature is right in sync with retailers," says Paul Walsh, senior vice president of Planalytics, a weather service that specializes in the weather's impact on consumers. "When it's cold, consumers get the whole Christmas spirit going."

Indeed, that's happening at Phat Fashions in New York, says Bernt Ullmann, president of the company. "I am a happy camper this morning," he says on a day that started with the thermometer at 27 degrees F. "With the weather cooperating, retailers are going to be very aggressive at promoting business."

But even when it was warmer in September and October, retail sales were stronger than expected. The healthy sales, combined with falling gasoline prices, prompted the National Retail Federation (NRF) this week to increase its growth estimate for holiday sales from 5 to 6 percent.

"We're a little more bullish on the holiday season," says Scott Krugman, a spokesman for NRF.

While the last two holiday seasons have been pretty good for retailers, this year would be an improvement over 2002, when the NRF estimates retail sales rose only 1.3 percent.

The biggest factor this year, says Mr. Zandi, is energy prices. In total, consumers will spend $150 billion more on energy than they did last year. "That's why I think people will spend a little less on toys and more on paying their energy bills," says the economist.

So it hasn't hurt that gasoline prices have fallen 85 cents a gallon or more from their post-hurricane Katrina high point, which topped $3 a gallon. Nationally, according to GasPriceWatch.com, gasoline is down to $2.14 a gallon. In Augusta, Ga., a gas station is selling it for $1.75 a gallon.

The lower prices are especially welcome in states where shoppers drive considerable distances to get to malls.

In the Los Angeles area, gasoline is now retailing for about $2.50 a gallon. This is a big relief, says Barry Riemer, owner of Hooked on Handbags, which sells overstocked merchandise at the Valley Indoor Swap Meet in Woodland Hills.

"I was hearing people in my mall a month ago forecasting a pretty bleak holiday season," he says. But now, the merchant says, "The trend in gas prices is down, and that helps."

High gasoline prices have not affected retailers who cater to upscale consumers. One of those stores is A Nose for Clothes, a south Florida dress shop with eight locations. Despite some days closed because of hurricane Wilma, the small chain expects double-digit growth, says Freda Greenbaum, an owner. "In the last few weeks, our business has picked up dramatically," she says.

Part of the improvement, she says, is that fashions this season are not overly trendy, compared with the bare-midriff look of a few years ago. "The market is showing clothes that are easy for a woman to wear," she says.

For retailers, this is by far the most important time of the year. The Friday after Thanksgiving is called Black Friday because it has historically been the time of year when stores go from operating at a loss (in the red) to making a profit (in the black).

A strong holiday season, says Mr. Feinberg, gives retailers the cash to restock their shelves in the new year. However, a weak season means the retailer has to borrow more, which means lower profits, less merchandise, and less hiring, he says.

"If they don't get the sales now, they can't expand and buy merchandise for the spring and summer of next year," says the Purdue professor.