Retailers look to strong finish for year

Despite persistent economic problems, consumer spending is expected to surpass the paltry rate of last year's holidays.

From candy stores laden with Halloween treats to florists readying for holiday orders, America's retailers are holding out hope that the all-important final quarter of the year will be strong.

Despite a stubborn job market and sluggish first half of the year, many signs point to a solid cash-register-ringing season ahead. Consumer spending is expected to surpass the lackluster gains of last year's holidays - but it probably won't come close to the booming growth rates of the 1990s.

Behind the improvement are consumers with more money in their pockets as a result of tax cuts and mortgage borrowing. The stock market is up about 20 percent from last year at this time, which adds about $2.5 trillion to the nation's wealth. At the same time, the national psyche seems to be in better shape, without the burden of orange terror alerts and the threat of war.

"Consumers are cautiously optimistic," says Lynn Franco, director of the Conference Board's Consumer Research Center. "They will be out there spending."

How successful retailers are will determine how strong the US economy ends the year. In the fourth quarter, the consumer becomes the driver of the economy, as those trips to the mall result in all sorts of economic activity - such as producing cardboard boxes, marketing toys, and processing credit-card information.

"Almost every aspect of the economy is affected by how well retailers do during the Christmas buying season," says Mark Zandi of And, as he notes, it will go beyond 2003: "It helps to set the tone for the following year."

Mr. Zandi is anticipating a 5 percent gain over the last holiday season, which saw only 2.5 percent gains. This, however, is down from 9 percent growth rates in the '90s.

The Christian Science Monitor/TIPP index of economic optimism (see chart, right) also edged up this month.

Persistent labor problems

One of the few clouds on the horizon is the jobs picture. Even though unemployment fell last month - and some new jobs were added - consumers still have low expectations for improvement. "The lack of improvement in labor market conditions continues to dampen consumer spirits," says Ms. Franco.

Sometimes consumers' behavior does not match what they say in surveys. For example, in the third quarter, the labor market was far from booming, which affected Americans' economic outlook, but consumer spending was nevertheless robust.

"We had explosive growth in consumer spending, and I don't expect that to continue," says Richard DeKaser, chief economist for National City Corp. in Cleveland. "Many of the goods they want to buy were bought this summer."

And so the press is on to pry consumers from their dollars. Stores are planning promotions and decorating their windows to remind customers of the shopping season ahead. Retailers are hoping that after keeping their hands in their pockets for the first half of the year, consumers have long shopping lists of everything from new electronic games to gold pocket watches.

At Montana Mills Bread Co. stores in the Northeast, they give away a "Montana size" slice of bread to consumers in the hope that consumers won't be able to resist buying the whole loaf. Right now, the free slice is cranberry pecan corn bread. Around Thanksgiving, it will be pumpkin nut swirl. For the holidays, it will be a German Stollen.

"They don't have to buy, but they usually do after they taste it," says Eugene O'Donovan, president of the company, which is based in Rochester, N.Y.

Such promotions, says Mr. O'Donovan, may lead to a 10 to 15 percent increase over last year, and perhaps as much as 30 percent.

KaBloom, a national floral chain, has planned several holiday-related campaigns. The company is currently pruning orange and black roses, and it also will give buyers "bounce back" coupons that offer a discount on the next order. At Thanksgiving, the company will donate a percentage of every sale to America's Second Harvest, a food bank.

It will also stress price. "You get a beautiful arrangement at great prices," says Steven Siegel, the chief operating officer of the Boston-based company. "We are expecting a very strong fourth quarter."

Surging sales on the Internet

While stores are racking up sales, e-commerce may be even stronger, says Kelly Markus, director of research at, a shopping-search website.

Mr. Markus expects sales via the Internet to rise by 22 percent over last year, which was up about 25 percent over the prior year. The hottest areas: online food and wine (up 208 percent last quarter), gifts and flowers (up 198 percent), and entertainment (up 180 percent).

"The weakest area was computer hardware, and that was attributed to pricing pressure," says Markus, whose company monitors a million buyers each month.

The better holiday season will be particularly welcome at Sherm Edwards Candies in the Pittsburgh area, which had to close one of its three stores after Mother's Day. The past three years, the company's sales have mirrored the stock market, says David Golembeski, president of the company.

"I've seen what's happened to my own portfolio, so I know how people feel," says Mr. Golembeski. "Candy is not a necessity. It's a luxury, and it gets cut out when money is tight."

"But this year," he adds, "we expect to have a decent Christmas."

Across the nation, the window displays and advertising are resonating with shoppers. In Hinsdale, Ill., Stephanie Simmons says the corn husks and witches remind her she needs to buy candy and a costume for her 3-year old, Sophie. "Once it turns cold, we'll go shopping for winter clothes," she says. "But, not until the Cubs season is over - we'll all be watching them."

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