Consumers close their wallets

More important, Gallup's surveys are finding upper-income people to be more pessimistic, he says. "Partly, it's the continued deterioration of housing values and their stock market wealth. But, on top of that, the credit crunch hurts more because they borrow more."

Jacobe says higher-income individuals are now starting to shop in stores such as Wal-Mart. On Thursday, Wal-Mart reported a 7.5 increase in third-quarter sales and a 9.8 increase in profits. At the same time, other more-upscale retailers, such as Starbucks and Best Buy, have reported less impressive results.

Although the retailing downturn is national in scope, some areas of the country may be suffering more than others. In Phoenix, the situation is "beyond belief," says Dennis Hoffman, professor of economics at Arizona State University's W.P. Carey School of Business.

In Phoenix, he says, retail sales in October fell 10 percent compared with a year ago, pulled down by a 25 to 30 percent collapse in automobile sales. "Every sign says 40 percent off," he says. "What we need is a positive psychological shot."

Professor Hoffman says he is an example of how grim news affects consumers. "We were all set to do some home improvement at our place in northern Arizona and then I just seized up on it. The thought of spending $40,000 right now makes you feel uneasy."

Retailers plan for poor holiday sales

Davidson's Mr. Dickson, who travels extensively throughout the Pacific Northwest, has been asking customers who normally do early shopping if they have started yet. "Not only have they not done it but they don't plan on doing it," he says. "And I get no responses when I ask if people plan on making any significant purchases."

Unless psychology changes, retail analysts expect the worst holiday sales period in decades. The International Council of Shopping Centers is now looking for a 1 percent increase in sales, down from an earlier forecast of a 1.7 percent increase.

"Stores will keep inventories tight, try to get merchandise out early, and offer deep discounts across the board," says Erin Hershkowitz, a spokeswoman for the business group.

All is not bleak, however. One beneficiary of the souring retail climate is Liquidity Services, Inc., based in Washington, D.C. Retailers and manufacturers sell their excess inventory to the company, which then resells it to some 1 million small businesses through its website www.liquidation.com.

CEO Bill Angrick says the company's six warehouses are now filling up with items such as Kenneth Cole shoes, Coach bags, Liz Claiborne apparel, and Samsung flat-screen TVs.

"Maybe a year ago, retailers would have been willing to muddle through this but in this era, they are slashing their positions and moving aggressively even before we have gotten to Thanksgiving," says Mr. Angrick. "For some it's no longer a matter of improving their return on investments, it's a matter of survival."

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