Holiday sales: Tough sledding ahead

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NEW YORK (CNNMoney.com) -- Santa's load will be lighter once again, with crucial year-end holiday sales expected to decline for a second year in a row, according to an industry forecast Tuesday.

Although many Americans have had a year to absorb shocks to the economy and to their own household budgets, the National Retail Federation (NRF) said continued job losses and stagnant income growth are forcing most consumers to keep shopping with extreme caution.

To that end, the trade group forecasts that this year's holiday sales for the combined November-December months will decline 1% to $437.6 billion. The decline would be narrower than last year's 3.4% drop for the season.

The two-month period can account for as much as 50% or more of merchants' profits and sales for the full year.

NRF's chief economist Rosalind Wells said she has seen some signs of a recovery in consumer spending after a dismal year thus far for retailers. Specifically, she pointed to somewhat better-than-expected retail sales in August.

"Consumer confidence hit a bottom [this year] and has improved with the bottoming in the housing market, but it's still wavering month to month," she said.

"As the global economy continues to recover from the worst economic crisis, Americans will focus primarily on necessities this holiday season," said Wells.

And merchants will respond with aggressive sales during the season, the group said.

Marshal Cohen, chief retail analyst with market research firm NPD Group, is feeling more optimistic. "I don't think it's going to be all doom and gloom," he said.

"On the surface, if we look at the weakness in retail sales so far [this year], it shows that sales will be down for the holiday season," said Cohen.

However, Cohen, who measures the holiday period from November through January, expects holiday sales could be flat to slightly higher than last year.

"There's tremendous amount of pent-up demand among consumers," he said.

Last year, many budget-conscious consumers bought gifts for others but skipped out on a self-purchase. "I think self-purchasing will go up this year," he said.

And as retailers become more competitive for consumers' dollars on the big-ticket items such as flat-screen TVs and personal computers, Cohen said consumers will find it hard to resist very aggressive discounts on those categories of electronics.

At the same time, Cohen said lack of credit availability remains a problem and could much limit how much some consumers can spend on gifts.

Last year, discounters ruled holiday sales as recession-wary consumers rushed to bag the best bargains at stores like Wal-Mart (WMT, Fortune 500).

"This year shoppers will start at the bottom, but they won't stay there," Cohen said. "They will move up to mid and high-end sellers for deals on better quality and variety of products."

Among discounters, Cohen expects Wal-Mart and Target (TGT, Fortune 500) to do well with holiday sales. Gap's (GPS, Fortune 500) premium 1969 jeans for under $60 should attract shoppers and he's betting that pricey seller Saks will perform the best among luxury sellers.

Craig Johnson, president of retail consulting group Customer Growth Partners, hasn't issued his holiday sales forecast yet, but he's ready to predict some other trends.

"Consumers should see some great bargains in electronics and apparel because there's been so much price deflation in those categories, and merchants will pass the savings on to shoppers for the holidays," he said, adding that Best Buy (BBY, Fortune 500) and Wal-Mart will dominate in electronics in terms of offerings and price.

But sales of home-related merchandise such as furniture and big-ticket appliances such as washing machines will be soft this year. Johnson agreed with Cohen on Gap's being a strong contender for holiday sales.

"Gap's 1969 jeans are very budget-friendly for consumers who want premium-quality jeans but don't want to spend $200 for them," he said.

Johnson also expects mid-priced department store seller Kohl's to do well. "They are in the sweet spot from a value-price perspective," he said.