Small Christmas for Retail
Holiday spending will be anemic in the U.S. as consumers worry about overextending their credit. Pro or Con?
Pro: Disappointment Under the Tree
Of the many negative financial issues affecting families today, credit pressures certainly top the list. Research performed by our firm, America’s Research Group, attests to it.
First, based upon our survey of 1,000 adults from Nov. 1 to Nov. 4, we found 47.5% have higher credit balances today than a year ago. Of those, 47% say they will spend less because of that debt. Also, 52.2% have noticed their monthly payments are higher today, and of those, 52.5% believe these higher minimum payments will cause them to spend less this holiday season. So it’s not surprising that 31.8% feel worse today than a year ago. Last year, 18.5% felt worse. In other words, that negative feeling had nearly doubled.
This Christmas, 30.4% feel they will spend less, compared with only 20.5% last year. That means 46.5% will wait until the 50%-off sales before doing most of their Christmas shopping. This number was 39.5% last year—it has gone up 20%. Credit-card debt is definitely causing one in every four families to spend less. One more point needs to be noted: 26.8% will spend less due to higher gas prices, and 32.4% feel higher gas prices will hurt their Christmas spending.
When studying these people further, we see those with higher credit-card debt are the same ones feeling the pinch from higher gas prices and higher food prices. These three negative issues are interrelated, and subsequently Americans with higher credit-card debt feel pressured not to increase spending. Credit-card debt is here, and it will cause one in four families to spend less this Christmas.
Con: Turning Up the Siren Song
Analysts suggest the long-awaited consumer cutback in spending is just around the corner as the subprime crisis has the financial sector struggling with hundreds of billions in losses. The damage is such that analysts are predicting the steepest drop in consumer spending in decades, possibly as much as $200 billion to $300 billion, or 2% to 3% of personal income.
But have these analysts paid a visit to the average American household during the holidays? They would surely find no shortage of enthusiasm for conspicuous consumption. As they anticipate a decline in consumer spending, mall operators and stores are tempting consumers—by starting their midnight openings on the day after Thanksgiving in order to give holiday shopping a head start. Reports say that Gap (GPS) is slated to have 150 stores open at midnight across the country, while toy chain giant KB Toys is looking to have 100-plus stores do the same.
So why is it most retailers seem unperturbed by setbacks in consumer spending? Well, let’s face it: The holidays are by and large associated with shopping, and there is no reason for that to immediately change. As much as overspending may be of reasonable concern to consumers, parents are not about to have their children rise gleefully from bed on Christmas morning to find a half-barren tree downstairs. Nor are friends going to make an overnight decision to cancel their Secret Santa exchanges or no longer give their loved ones something special for the holidays.
Moreover, there is little that can be done to put the brakes on consumer expenditure in a country where borrowing is almost always an option. Adjusted for inflation, consumer spending has risen in every quarter since 1991. Even if credit-card companies are feeling increasingly cautious when it comes to lending, consumers still have $3.8 trillion in unused borrowing capacity on their credit cards. And retailers have no qualms about urging buyers to apply for their proprietary credit cards, so if a Macy’s (M) Star Rewards card or a Victoria’s Secret (LTD) Angels card is available at the drop of a hat, the “buy now-pay later” module will remain mostly intact for the holidays.Opinions and conclusions expressed in the BusinessWeek Debate Room do not necessarily reflect the views of BusinessWeek, BusinessWeek.com, or The McGraw-Hill Companies.