Holiday retail outlook: more conservative

As he pumps $3.25-a-gallon gasoline into his taxi, Larmont Smith says the rising prices at the pump are eating into his profits, adding to the hours he has to work until he makes money. The added cost, he says, probably means he'll spend less on the holidays on his wife and three children.

"Everything costs more – the milk, the groceries," he explains. "I'm telling my wife now is the time to save, not spend."

To economists, Mr. Smith is probably the spirit of Christmas 2007 – a more conservative consumer. Dragged down by rising energy prices and falling home equity, Americans are no longer opening their wallets quite so readily. As a result, their spending is no longer pulling the economy forward the way it has for the past decade.

"The consumer has gone from being an engine of growth to merely a supporting player for the economy," says Richard DeKaser, chief economist at National City Corp. in Cleveland.

That'swhy retail experts believe spending for the holidays will rise about 4percent this holiday season – the smallest increase in five years. Yeteven though the increase could be modest, it should still be enough tohelp the economy close out the year in the black.

"Itwill be slow but not a disaster," says economist David Wyss of Standard& Poor's in New York. "It does not necessarily mean a recession."

Slowerspending this holiday period would fit in with consumer spending forthe year. Thirty percent of the economy is nonconsumer related, and ithas grown at a 2.9 percent annual rate through the first nine months ofthe year. Consumer spending has been up a bit less – 2.8 percent – inthe same time period.

"The principal reason is the impactof higher energy prices. It's taking a bite out of consumer incomes,leaving less for discretionary purposes," says Mr. DeKaser. "There isadditional evidence that there is a return to thrift as people aresaving more than in the past."

In a survey this month ofmore than 500 consumers, Accenture, a management consulting firm, foundthat 45 percent of respondents said they would make fewer trips to themall because of higher gas prices. "This is the first time people saidit would matter to them," says Janet Hoffman, managing partner of thefirm's North American retail practice. "It's astounding, but in thepast when we surveyed, people said it had no impact on them."

Forsome, that's still the case. As he parks his car in Manhattan, AlVance, a resident of New Jersey, shrugs off the higher fuel prices."I'm still planning on spending the same," he says. "The holidays arethe holidays.

And at the same gas station where taxidriver Smith was filling up, Kevin Browne says he'll just reach deeperinto his pocket to buy gifts for his 19-year-old daughter. "You have todo what you have to do," he says.

Although gasolineprices normally go down at this time of year, they have instead beenrising, reflecting the rising price of crude oil, which is now morethan $97 a barrel. According to the Energy Information Administration,the national average of gasoline is now $3.10 a gallon, compared with$2.24 a gallon a year ago – a difference of 86 cents a gallon. Somepredict that the price of fuels may rise further in December to reflectthe higher price of oil.

"If gasoline prices go up 30cents a gallon in December, that would be $1 billion not available toretailers," says Richard Feinberg, a professor at the Purdue RetailInstitute in West Lafayette, Ind. "A penny more for gasoline or a $1more for home heating oil comes right from the checkbook."

Surveysof consumer confidence are also starting to show an erosion in terms ofjobs and income gains. "It's comparable or softer than last year, andwe're seeing some apprehension going ahead," says Lynn Franco, directorof the Conference Board's Consumer Research Center in New York. "But,while it's moderated, it's still strong enough to support spending."

OnTuesday, the Conference Board released a survey that found thatconsumers will spend an average of $471 on gifts this season, up from$449 last year, an increase of almost 5 percent. Thirty percent willspend $500 or more.

Many retailers are already trying tofind ways to entice consumers. "It's going to be a good year forbargains from the consumers' perspective," says Jay McIntosh, theChicago-based Americas director of consumer products at Ernst &Young. "Toys especially will be discounted heavily because ofconsumers' concerns about safety" stemming from recalls.

Someof those discounts are already showing up at places like eToys.com,which has sales of up to 60 percent off through Thanksgiving Day. Forexample, the Real Chocolate Fountain, which allows children to dipdried fruit under flowing chocolate, is $3.99, compared with a listprice of $24.99. The "My Scene Goes Hollywood: Limo," a toy carcomplete with a beverage bar and hot tub, is discounted from $59.99 to$12.99.

Some apparel retailers are also planning onsales. At figleaves.com, an online retailer of pajamas and sleepwear, aThanksgiving sale is taking 20 percent off its entire stock. After thatsale ends, a new one will provide discounts on selected items throughChristmas.

"It's a great incentive for customers toshop on our site in the weeks leading up to the Christmas holiday,"says Jo Jeffery, vice president of communications for figleaves.com inLondon.