Forecast: A Very Happy Consumer Holiday

With gas prices down and confidence in the economy up, it looks like shoppers will be out in force—which should, in turn, boost the economy

by Pallavi Gogoi

Get ready for madness this holiday season. Remember Black Friday, the now-traditional start of the holiday shopping season on the Friday after Thanksgiving? Well, this year, instead of the usual 5 a.m. opening, the retail rush will start at midnight at many malls. Simon Property Group (SPG) is running its "Midnight Madness" at eight locations, including the Woodbury Commons outlet center near New York. Tanger Factory Outlet Centers (SKT) also will run its "Moonlight Madness" at eight centers.

Clearly, retailers don't want to wait for shopping's shiniest season to begin. Just look to the latest round of forecasts to understand why: The predictions are that Americans are going to open their wallets wide this holiday. Several recent surveys and studies have helped lift the clouds of doom and gloom from a few months ago, giving way to what looks like a very happy Christmas shopping season for retailers.

Forecasting Growth

Retail consultants at Ernst & Young say holiday shopping will increase by 6.5% this year, just a tad below last year's gain of 6.7%. Another consultant, BDO Seidman, found in its survey that chief marketing officers at leading U.S. retailers predict a 7.8% growth in 2006 holiday sales. And Deloitte & Touche's survey, released Nov. 1, found that American consumers are so bullish about the economy that 63% of them will pay for holiday purchases by using cash or cash equivalents like checks or debit cards. "Looks like folks have more cash in their wallets than they did earlier," says Pat Conroy, vice-chairman and national managing principal for Deloitte's Consumer Business practice.

Why the sudden boost in confidence? A key catalyst has been declining gas prices. "Falling gas prices has put at least $100 of spending power back into consumers' pockets," says Darrell Rigby, head of the global retail practice at consultant Bain & Co. Bain is predicting that retail sales this holiday season will rise by 5.5%, compared with the historical average of 4.3%.

But the recent strength also has been bolstered by other key economic factors, like stable interest rates and some improvements in wages and jobs. "Consumers expect a larger wage gain and also strong employment growth, which gives them confidence that the economy will improve in the coming months," says Richard Curtin, director of the University of Michigan's Survey of Consumers, which saw its consumer-sentiment index hit 93.6 in October, its highest level since July 2005. "Consumers do expect the housing sector to be weak, but they don't consider their overall household wealth to have diminished because the stock market has done so well this year."

Shopping for a Stronger Economy

The prospect of strong consumer demand in the months ahead comes at a crucial time. While the Federal Reserve, under Chairman Ben Bernanke, pushed up interest rates for months in an effort to cool the economy down, there are now concerns that the effort may be going too far. The slowdown in housing has hit homebuilders like Pulte Homes (PHM) and Lennar (LEN) and may have an impact on other sectors of the economy (see BusinessWeek.com, 10/30/06, "The Economy's Housing Problem"). And on Nov. 1 the manufacturing sector showed its most sluggish growth in three years, with the Institute for Supply Management's factory index dropping to 51.2, below economists' expectations.