Tis the Season to Be Wary

Retailers fear that the recession may mean a blue Christmas

Despite gyrations of the U.S. economy, retailers have traditionally counted on, and in most years enjoyed, enough business at Christmas to make being an American storekeeper worthwhile. But merchants this year are concerned that the 1981 Christmas selling season may turn into one of the worst ever. Recession, unemployment and high interest rates could deal a Scrooge-like blow to the holiday spirit of U.S. consumers.

Stores anxiously waited last week to see the first indications of Christmas buying when the season officially started the day after Thanksgiving. Crowds jammed New York’s Fifth Avenue, but there were more window-shoppers and browsers than buyers. Said one shopper at Lord & Taylor in Manhattan: “The crowds come in, but they don’t purchase anything. This is a day for tourists in New York.” Traffic was brisker and customers seemed to be less tight-fisted up the street at Saks, where high-priced gourmet foods and designer clothing were selling smartly.

In Chicago, Marshall Field Chairman George Kelly described the first day’s business as “not quite as good as in past years,” although he was optimistic about the holiday season. And a shopping mall manager in Memphis said, “It’s not what it was last year.”

Most retailing-industry analysts expect sales to improve somewhat this week and next, with a surge coming in the last two weeks before Christmas. That is what usually happens. Business may also be helped by further encouraging news on inflation and interest rates. The Labor Department reported last week that inflation in October increased at an annual rate of only 4.4%. Meanwhile, banks around the U.S. continue to lower the bench-mark prime interest rate. Last week several major financial institutions dropped the level to 16%, and a bank in St. Louis even went to 15.5%. Only three months ago, the rate was 20%.

Nonetheless, few retailers or industry watchers expect Christmas sales this year to set any growth records. Said Joseph Ellis, a merchandising watcher for Goldman, Sachs & Co.: “By the time the smoke clears in January, I don’t think it will have turned out to be a strong Christmas season.” Added Robert Ortner, chief economist at the Commerce Department: “Christmas sales will be mediocre at best.”

That makes the outlook doubly grim for retailers. Third-quarter profits for some of them were way down because of the accelerating economic slide. Los Angeles-based Carter Hawley Hale Stores, for example, showed an earnings slump of 35%, and profits at Allied Stores, which owns Bonwit Teller, declined 36%. These and other retailers look to Christmas for 25% of their annual sales and 35%, even 45%, of their yearly earnings.

Retailers, usually an outwardly optimistic lot, are guarded this year. Said Robert Mooney, corporate economist for New York City-based J.C. Penney, the third largest U.S. retailer, behind Sears and K mart: “It’s going to be a fairly good Christmas, though not a robust one.” Mooney foresees a sales increase, after inflation, of only 2.5% to 3% for the industry this year.

Analysts are generally expecting perhaps the most sluggish Christmas since the recession of 1974, a year in which sales in real terms were actually 4.5% lower than the previous year. Said George Hanley, vice president of Manhattan’s B. Altman: “It has been a long time since we have gone into Christmas with the momentum slowing. It’s going the wrong way, and that’s scary for us.”

Consumers have been making their penny-pinching sentiments known for some time. Polls conducted by the Conference Board, a Manhattan business-study group, show that Americans are wary about the economy and in no mood to spend bushels of money on Christmas, let alone on such big-ticket items as automobiles and major appliances. The board’s index of consumer confidence plummeted from 82 in August to 69 in October. A Washington Post-ABC News poll found that three of five Americans will cut back on Christmas gifts this year.

In a study done for the U.S. Chamber of Commerce by Gallup polls in September, 55% of consumers said that now was a bad time to buy expensive items for the home. In June only 48% felt that way. Says Paul Reardon, associate chief economist for the chamber: “Things have fallen apart since September. It is just the idea among consumers that they might be laid off.”

Christmas sales are not being helped much by the Reagan package of tax cuts that started going into effect in October. Instead of spending money from the tax reduction, people appear to be doing just what some Reaganauts had hoped for: they are saving it. Disposable personal income for October rose by $24.7 billion. But savings for that month went up by even more: $28.5 billion. Worse still from the standpoint of retailers, consumers seemed to be a little less credit-happy; installment debt has dipped from 18% of disposable income to 15.9%.

This trend could hurt particularly the sale of big-ticket luxury items like jewelry and furs. Said one retail analyst: “Savings are again attractive for high-income families. In past Christmases they had no real incentive to save, so they spent. This year they may save.”

That would be positive for the economy as a whole, in the long run, but it hurts retailers right now. Economist Otto Eckstein, the chairman of Data Resources, Inc., a Lexington, Mass., consulting firm, foresees marked Christmas-spending cutbacks among lower-and middle-income people. These are the consumers who depend most heavily on revolving credit, where interest rates sometimes reach 20% and 21% for purchase payments dragged beyond 30 days. Says Eckstein: “The more you go into blue-collar items, which are found in stores like Sears and K mart, the worse the prospects.” Adds Robert Sakowitz, president of the tony Sakowitz stores in Texas: “The people who merchandise in the mediocre middle are going to be hurt.”

That downbeat pattern seems to be holding in cities like Memphis, where about 60% of the population falls within the low-income category. a Memphis department-store chain, closed three of its stores last month. Says Kurt Flexner, a professor in Memphis State’s economics department: “Many people are being affected by the new federalism and high unemployment, and they are simply going to have to abandon their plans for Christmas.”

Some analysts see some cause for cheer in the rapidly slowing economy, with its plunging sales of houses and auto mobiles. Money not being spent on those items, goes their reasoning, may show up in increased sales of less expensive items at Christmas. Says Don Deutsch of Sears in Chicago: “We expect to do a strong business in the small-ticket lines like toys, apparel, 35-mm cameras, digital clock radios and stereo equipment. This should be a big year for consumer electronics, especially video cassette recorders and electronic games.”

To build store traffic, nervous retailers have been staging “pre-Christmas” sales for the past several weeks. Some lines of top-quality women’s sportswear, for example, went on sale in mid-November at Saks in New York City and Garfinckel’s in Washington, D.C. Lord & Taylor in New York offered 20%-to-35% discounts on clothing the day after Thanksgiving. Said Charles Lee, president of the Memphis Retailers Association: “We’ll be lowering prices and offering bargains throughout the season.”

Not all retailers are expecting the worst. Brooks Brothers believes that its well-heeled clientele will spend heavily. Says Vice President Robert Dawson: “We’re looking for the best Christmas we’ve ever had.” Adds Gordon Cooke, senior vice president of trendy Bloomingdale’s: “We have started to see a resurgence.”

There is a hope, however faint, that all the projections might turn out to be wrong and that the last few days before Christmas will engulf the country in a buying binge and give the season a little sparkle. Says Analyst Walter Loeb Morgan Stanley & Co.: “Everyone is a sentimentalist when it comes to Christmas. So many times, at the last minute consumers have a change of heart and go out shopping again.” For the past two years, sales were very slow until the final week before Christmas, when procrastinating consumers finally started spending heavily.

If this turns out to be the year the Grinch steals Christmas, it could be a devastating blow to the U.S. economy. Slow sales now would force businesses to enter the new year with the burden of very large inventories and few prospects of relief. That would probably lead to still more layoffs and make the current recession both deeper and longer than most economists now predict.

—John S. DeMott. Reported by Gisela Bolte/Washington and Stephen Koepp/New York, with other U.S. bureaus