A Forecast for an ‘Abysmal’ Holiday Shopping Season

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The New York Sun

It sounds wild, but don’t rule it out – a no-show by Santa this year for many if not most American households, save for the well-heeled.


This possible scenario is put forth by a number of business watchers, among them Irwin Kellner, chief economist of the North Fork Bank, the country’s 20th-largest banking institution and one of the more respected economic minds around. Taking note of the effects of soaring energy prices, rising interest rates, and a massive buildup of debt, he says, “The consumer is rapidly developing into a financial weakling.”


Accordingly, he predicts, “the holiday season for most retailers will be abysmal. Call it terrible, horrible, or what you will.” Consumers, he says, are headed to a sharp spending slowdown. And if you factor out higher prices, he says Christmas sales will be flat. One reason, he thinks, is that because of high gas prices, the usually frenzied driving from mall to mall at Yule-time will no longer be a part of this year’s holiday shopping scene.


A Los Angeles money manager, Leonard Mohr, a principal of MCR Associates, pretty much thinks the same. Accordingly, he’s shorting a bunch of retail stocks, betting their prices will fall, “because we think they’re in for a lousy Christmas,” he says. “And they seem to feel the same way because every retailer we talk to sounds worried and is planning to play it safe for the holidays by offering scaled-back inventories.” Mr. Mohr adds that he’s not shorting the luxury retailers, but primarily department stores and mass merchandisers.


A West Coast economic consultant, Ruth DeWitt, says, “It could be goodbye Santa, hello Ebenezer Scrooge this year as cost-conscious shoppers try to save money on their Christmas gifts.” Pointing to shrinking consumer confidence, weakening housing numbers, higher gas prices, and renewed job worries, she believes cutbacks in holiday spending are a foregone conclusion. “I would expect the public to buy fewer presents and spend less per present,” she says.


Mr. Kellner thinks this year’s holiday shopping also will be negatively impacted by mounting signs of a recession – evidence of this includes a current shopping slowdown, weak employment and retail numbers in September, a flattening of home prices, and rising inventories of unsold houses. A recession, he believes, could occur before the end of the year or in the first quarter of 2006, and should become more apparent as holiday shopping weakens.


One reason he thinks the public will become more recession-conscious is his belief that “it’ll feel like a recession because it will be harder to get a job and harder for companies to raise prices and sell their products and services.”


Speaking of jobs, Mr. Kellner sees the unemployment rate headed higher, rising from 5.1% in September to 5.3% to 5.4% this month and then on to 5.5% in November and staying at 5.5% in December. He figures between September and year-end the country’s jobless ranks will swell by about 500,000.


Adding to the woes, he says, is that the Fed, focused on inflation and rightfully so, will seek to inflict pain through monetary restraint (or higher interest rates) to dissuade people from buying and paying higher prices.


Like most economists, he expects the Fed to hike short-term rates by another 25 basis points at each of the year’s two remaining Federal Open Market Committee meetings in November and December, in turn wrapping up 2005 with a Federal Funds rate of 4.25%. After that, Mr. Kellner looks for the rate to be boosted again to 4.5% in January and to 5% by mid-2006.


The big risk, he points out, is that the more the Fed jacks up rates, the higher the likelihood it will lead to a recession.


Overwhelmingly, his economic brethren, based on their GDP forecasts, disagree with his gloomy economic outlook. His reaction: “Most economists are way too optimistic.” For example, he takes issue with Wall Street’s consensus projections that call for GDP growth of close to 4% for the third quarter and 3% to 3.5% in the fourth quarter. In contrast, he sees slower growth of close to 3% in the third quarter and 2% to 2.5% in the current quarter.


A similar pattern holds true in his GDP predictions for all of 2006. The consensus sees growth of 3.3%; Mr. Kellner, 2.8%.


The big worry here: If he’s correct, especially as it relates to the prospect of a no-show Santa, it all adds up to a faltering economy and bum earnings tidings. And, as we all know, that’s not the stuff that rising stock prices are all about.


dandordan@aol.com


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