'Ho, Ho, Ho' may be 'Oh, No' for economy

Holiday spending could result in a worse hangover than normal in January due to a tighter credit market, according to economists and experts.

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NEW YORK (CNNMoney.com) -- Santa Claus may leave a recession under the tree this year, as economists worry that tighter credit standards will put the brakes on consumer spending in the new year.

Consumers flashing credit cards have gotten the holiday shopping period off to a relatively good start since they pushed away from the Thanksgiving dinner table last Thursday.

ShopperTrak RCT Corp., which monitors sales at 50,000 retailers, estimates that total sales rose 8.3 percent to about $10.3 billion on Black Friday, the day after Thanksgiving. And online retailers are believed to have broken one-day records for traffic and sales on so-called Cyber Monday, as they logged in for more than $700 million in purchases.

But when their credit card bills start coming due early next year, consumers could face problems they haven't had to address in years, as the credit crunch puts a squeeze on additional spending going forward.

"We think this holiday shopping period will be a last hurrah for a while," said Mike Schenk, senior economist with the Credit Union National Association.

Consumer spending accounts for more than two thirds of the nation's economic activity, and thus far it has kept the economy out of trouble despite the headwinds of $90 oil, a stock market correction and the combined problems facing mortgages and housing. It won't take much of a cutback to hurt the nation's economy, and possibly even cause a recession.

"They'll still be spending money, but it will be on credit card interest and minimum payments, not on apparel or eating out," said John Silvia, chief economist for Wachovia. He puts the chance of a recession next year at 30 percent - up from 21 percent in his previous estimate.

Federal Reserve figures show that consumers are heading into the holidays with larger credit card balances than they did a year ago, as access to home equity lines has been hit by falling home values, according to Silvia. And he and others say some of the ways consumers dealt with post-holiday credit card balances in the past will not be options this year.

Banks are tightening their standards for credit cards and consumer loans, even though those loans are not directly affected by problems in the broader credit and mortgage markets, says Red Gillen, senior analyst with Celent, an independent research firm that follows financial services.

"They're under a lot of scrutiny right now, and they're seeing increasing delinquency and default rates," Gillen said. "That will translate into more people being denied credit cards, or being denied the chance to increase their credit line."

So consumers will find a very different environment for credit cards in the new year, one that will make it more onerous to shed their holiday bills.

"I've been tracking this industry for 10 years," said Curtis Arnold, founder of CardRatings.com, a Web site that gives consumers information on various card offers and providers. "We've always had a January hangover, but this year makes me more nervous than any other."

Arnold said some banks are even trimming existing credit lines on cards or imposing higher penalties for narrowly missing payment deadlines. And 12-month, zero-interest offers for new cards - common a year ago - are now relatively rare, he said.

Arnold said that many consumers, particularly those without top credit scores, will no longer be able to easily transfer balances to new cards carrying low introductory rates.

"That's what consumers have fallen back on, and it's been a lifesaver for the economy. It worked pretty well, even if it masked the whole consumer debt problem," said Arnold. "But that safety net [for consumers] is not as much of an option these days."

When you couple the looming credit card squeeze with higher gasoline and heating costs, consumer spending could finally sputter and threaten economic growth.

"The holiday season is an important part of consumer spending, but it's also important what goes on every day," said Gus Faucher, director of macroeconomics for Moody's Economy.com. "If consumers look at their finances after the holiday and at the economy and say, 'I've got to watch my spending,' it definitely could slow down spending."

Faucher's firm is forecasting a one-in-three chance of a recession, but he expects to increase the odds of a recession in December. Whether a slowdown in spending is the final cause of the recession or whether it's other factors, such as rising unemployment or energy prices, is impossible to quantify, he said.

David Wyss, the chief economist for Standard & Poor's, said he believes the biggest credit crunch for consumers will still be from the much greater difficulty drawing cash from home equity lines or mortgage refinancings. But that affects credit card balances because much of that $640 billion cash that was pulled out of homes in 2006 had gone to pay off credit card bills. This year homeowners will be able to tap their homes for 25 percent less cash, which is one reason Wyss sees a 40 percent chance of a recession next year.

"The house is no longer an open ATM machine," he said. "Generally if people have money, they're going to spend it. But this time they won't have quite as much. We are worried about that."