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.

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