Mixed forecasts for holiday spending

This season is presenting a fuzzy picture as economists gather into bull and bear camps.

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By Suzanne Kapner, writer

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NEW YORK (Fortune) -- The stock market is up. Consumer confidence is down. Unemployment is way up. Gas prices are down.

Economists trying to predict consumer shopping habits for the upcoming holiday season -- never an easy task -- are facing a particular challenge this year: a pile of conflicting data.

That has created a sharp divide between bulls, who say a booming stock market and record Wall Street bonuses will feed pent-up demand, and bears, who argue that soaring unemployment and static wages will keep a lid on spending.

"Clearly, there are a lot of different tea leaves floating around," says Craig Johnson, president of Customer Growth Partners, a retail consulting firm.

Economists aren't the only ones stumped by the conflicting signals. Luxury firm Richemont told analysts on a recent conference call that the upcoming Christmas season would be "difficult to predict."

That uncertainty has led some retailers to curtail orders for the holiday season, potentially leaving them short of goods if demand turns out to be stronger than expected.

Analysts are generally calling for retail sales to either fall no more than 1% or rise no more than 2.4% during the November-December period. But even within that narrow range there is disagreement about how the consumer will behave. Helping to muddle the picture are some contradictory economic indicators.

Take retail sales, for example. The widely watched measure was stronger than expected in September and October. Moreover, U.S. Commerce department figures released on Monday showed a surprising uptick in apparel sales -- a category that had been hard hit during the recession.

Yet, sales of big ticket items, like furniture, have yet to rebound, suggesting the consumer is still fragile and prompting the National Retail Federation to characterize October's results as a "mixed bag." The conflicting signals make it "hard to gauge how the holidays will play out," says Rosalind Wells, the NRF's chief economist.

Also troubling: Early reports point to a slowdown in spending for the first two weeks of November. "There are days that are strong, but in an overall environment of weakness, which makes the numbers harder to read," says Michael Niemira, chief economist for the International Council of Shopping Centers.

Niemira is currently calling for retail sales to rise 1% to 2% during the November-December period, but plans to update his forecast following the post-Thanksgiving weekend, which accounts for a large chunk of holiday spending.

Also clouding the picture is the unemployment rate, which at 10.2% in October, is the highest since April 1983. Analysts don't expect the figure to fall to pre-recession levels anytime soon, which is one reason why Fitch, the credit rating agency, is calling for sales to remain flat this holiday season compared with a year ago. Even here there is a silver lining, though: initial jobless claims have begun to decline, suggesting that unemployment may have hit its peak.

And despite the booming stock market and the promise of fat Wall Street bonuses, consumer confidence continues to erode. In October, the Conference Board's present situation index hit its lowest level in 26 years.

"There are some mixed messages out there going into the holiday season," says Stacy Janiak, who leads the retail practice for Deloitte.

One of them is Deloitte's consumer spending index. The measure has increased for the past four months, meaning that consumers have more cash to spend. But instead of lavishing it on clothing, cars or furniture, they are using the money to pay down debt.

Two big unknowns further complicate this year's estimates: the effect that pending health care legislation will have on the economy and whether the recent consumer frugality will outlast the recession.

"Some of the habits formed over the last few months have a certain amount of permanence," Janiak says. "But if you look back at history, U.S. consumers don't do well with long periods of austerity."

It's not unusual for mixed signals to abound when the economy changes direction, either heading into or out of a recession. What is different this time is the slow pace of the recovery. "Most people are used to the economy taking off after a recession," Janiak says.

Despite the overhanging gloom, some analysts say they are starting to see more positives than negatives. "It's been choppy," Johnson, of Customer Growth Partners, says. "But we did see a turn in consumer spending that started about six weeks ago."

That uptick is one reason why Johnson is predicting a 2.4% rise in holiday spending, making his one of the more buoyant forecasts in circulation. The next few weeks will show whether that optimism is justified -- or just another holiday wish. To top of page

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