Consumers And Retailers Expect Soft Holiday Spending

Xiomara Bermudez plans to spend less or about the same on Christmas presents compared with last year even though her husband, an air conditioner mechanic, is expecting a wage increase soon.

“Even if the raise is coming, it’s going to the second kid, to diapers,” says the 29-year-old stay-at-home mother of a toddler and infant. “I always buy for the kids. If I had a lot of money, I would buy for the adults too.”

She plans to bake cookies in the couple’s Queens, New York, apartment and distribute them as gifts to friends.

Bermudez isn’t the only holiday gift-giver who’s planning to improvise with cheaper options this season. Much to the disappointment of retailers, there is evidence that tepid wage growth in the slowly recovering economy will result in softer-than-expected holiday spending this year. Although unemployment has fallen to 5.8 percent in the strongest U.S. hiring streak since 2006, some 7 million Americans are working part-time when they’d like a full-time job, and the number who’ve given up looking for jobs -- and therefore not counted as unemployed -- is at a level not seen since the 1970s.

Angela Riemenschneider, a 39-year-old single mother who lives in Sioux Falls, South Dakota, says she will spend less on gifts this year too. She says she’ll probably buy Minecraft Legos and some video games for her 9-year-old son, but as an office manager for a dentist’s office, she’s been busier with work compared with last year. Riemenschneider has worked at the office for 2.5 years and hasn't received a raise. “We used to get bonuses quite regularly but those have lessened,” she says.

In recent weeks, many retailers have adopted a more cautious tone than industry researchers and economists about the holiday season.

Even so, the world’s largest brick-and-mortar retailer, Wal-Mart Stores Inc., told investors Thursday it expects the holiday season to be “highly competitive” even as the company is resorting to deep price cuts to attract consumers. Wal-Mart has cut prices on 20,000 items and is offering free shipping on its top 100 items.

The company said Thursday that it will also price-match Amazon.com and other online retailers over the holiday season, a move that “shows the level of desperation it’s resorted to in an effort to stop its customers shopping elsewhere,” says Joshua Raymond, a senior market analyst at the U.K.-based broker City Index.

Sales across the retail industry have been weak this fall, and the fierce price-cutting is eroding companies' margins. Gap Inc. reported a drop in sales in October, and this week Macy’s and Kohl’s each reported disappointing sales in their latest quarters and lowered their full-year earnings guidance. Ann Taylor LOFT owner Ann Inc. recently warned investors it also wouldn’t meet sales expectations in the latest quarter, and J.C. Penney disappointed investors Wednesday with flat same-store sales in the third quarter versus an expected 3 percent rise.

Retail analysts and economists insist that Americans will spend more on holiday shopping this year than each of the past two years, but last year’s seasonal sales were hit by economic uncertainty surrounding the federal government shutdown, making a year-on-year comparison favor 2014. Global business advisory firm FTI Consulting said recently that it expects a 3.5 percent increase this November-to-December period from last year. Industry group National Retail Federation is even more optimistic, forecasting 4.1 percent sales growth, which would be the first time in three years above 4 percent.

Federal data showed consumer spending dipped in September after a robust August. Retail sales in September fell 0.2 percent, excluding autos and despite sales of more than 10 million iPhone 6 models. Data for October retail sales will be released Friday.

“There have been small finds of a slowdown in spending growth over the past few months, but I’m not too worried about them,” says Paul Dales, senior U.S. economist for Capital Economics.

He gives three reasons: wage growth is starting to pick up, gasoline prices are at four-year lows nationally, and debt levels are lower than they were three to four years ago while credit conditions remain good.

“Because people use about the same amount of gas each month, they’re paying less and have more to spend on other items,” Dales says. “It’s a kind of year when people are in the mood to spend on other items.”

Third-quarter consumer spending growth came in at a 1.8 percent rate, weaker than the second quarter’s 2.5 percent reading. So while economists forecast higher growth in the fourth quarter, it may not be much to boast about.

“Sometimes we don’t even exchange gifts,” says Clay Gordon, a single 25-year-old working for a political advocacy group in Washington, D.C. He says he’ll probably spend less on gifts this year even though he got his first salaried job in January.

Pat Lorimer, a personal assistant to the owner of Ridgmar Oil & Gas in Fort Worth, Texas, also plans to spend the same amount on Christmas gifts as last year.

“I have the same people that I always shop for,” Lorimer, 62 and mother of three adults, says. “I made my list. There’s nothing different.”