CHICAGO — Retail sales this holiday season will be impacted as much by emotions in the aftermath of Sept. 11 as it will be by economics.
The attacks, and the subsequent blow to the U.S. economy, have caused many consumers to reassess their financial and personal priorities and adjust their spending behavior accordingly.
Americans are expected to spend their money on practical purchases for the home this holiday season rather than on more “extravagant” purchases like travel, recreation and personal services.
That’s how Bank One Chief Economist Diane Swonk envisions the activity for the upcoming shopping season.
In her annual holiday season forecast, Swonk said total retail sales for this month and December will rise 3 percent over last year’s holiday season, bolstered primarily by purchases for the home.
Retailers specializing in big-ticket items like vehicles, appliances, furniture and hardware-related durables will likely do well in this recessionary period, and it’s a unique recession in that regard, Swonk noted.
She anticipates that general merchandise and apparel purchases will increase 2.1 percent this season and that luxury retailers and department stores will probably continue to lose some business to discounters.
Swonk sees several shifts in consumer spending for the remainder of the year:
- People will stick closer to home and opt to spend money on small holiday get-togethers as opposed to lavish parties.
- Recreation and personal care spending will slow sharply, with tourism, resorts and personal services hardest hit.
- Big-ticket items will continue to sell as the momentum created by earlier home sales works its way through the economy and zero-percent vehicle financing is extended.
- Consumer electronics will be boosted as “cocooning” consumers invest in cell phones, DVDs and computers.
Retailers have been “cautious” about placing orders, thus reducing the chance of an after-holiday inventory “hangover.”
Catalog and online sales could fare better than sales at brick-and-mortar retail outlets if consumers slip into cocooning mode and temporarily refrain from venturing out into public places, she noted.
“So far, however, consumers have flocked to the malls just to feel some sense of normalcy after Sept. 11,” Swonk observed. “We’ve seen people returning to malls, going back out to restaurants and, particularly, staying close to home and going to movie theaters.” In fact, movie theater ticket revenues surged in the wake of Sept. 11.
Consumers were spending at nearly three times the usual pace in the months leading up to Sept. 11. Now mortgage refinancing has surged to a record high.
“What looks to be happening right now in terms of mortgage refinancing is that a large number of consumers are starting to restructure their debt in a very massive way,” Swonk observed. “That’s wonderful news for the recovery.”
Through last year consumer spending had been shifting from traditional retailers to personal services that “buy back” consumers’ free time.
Last year, the personal care and recreation category grew at a 7.2 percent rate over the holiday season. This year Swonk expects to see a very sharp slowdown to 2.4 percent in that category.
“That’s a very dramatic change,” she pointed out. “It does not include the airline issues and the travel issues, but does get into some of the amusement park revenues that are being intercepted by the travel problems we’re having today.”
Current layoffs are very different from the kinds of layoffs seen over the last year, Swonk said. Layoffs accelerated after Sept. 11 and involved firms that weren’t directly impacted by the events.
Companies are now executing layoffs they announced in the last year; they’re defending their bottom lines — with the exception of increased compulsory spending on security personnel.
Swonk predicts a more rapid than usual jump in the unemployment rate. But she points out that more than 90 percent of the labor force is still working, and current conditions don’t mirror the recessionary magnitude of the early 1990s.
“We’re not sure if it works on the layoff side, but it’s estimated that one job in the airline industry is correlated to 16 jobs in the tourism industry,” she said. “That would mean 1.6 million tourism jobs lost for 100,000 already lost in the airline industry, at least temporarily.”
The worst in layoffs and the worst in economic ramifications of the job cuts in terms of income losses are still to come.
On the regional level, the Great Lakes region shows both strengths and weaknesses. Cut-rate financing has boosted vehicle sales, and with inventories already low, there’s a good chance vehicle production will pick up in the first quarter, according to Swonk.
The region’s trucking industry will probably see a modest rebound as the reduction in commercial air traffic has companies seeking other ways to ship goods. Furthermore, the U.S Postal Service is looking for alternatives to passenger jets for mail as tighter restrictions on cargo could delay mail deliveries.
Swonk predicts a strong, swift economic rebound after the holiday season gives way to the New Year — if there are no further disruptions in the U.S.
The financial system is sound and the Federal Reserve’s monetary stimulus by way of nine cuts in the federal funds rate this year is beginning to kick in. Furthermore, the Fed appears willing to ease the rate further, she noted. There’s the tax rebates on top of that.
“This is a nation that is almost unique in its ability to rebuild and fortify,” Swonk concluded. “Other economies have adapted to terrorism and successfully expanded — notably the U.K and Israel.
“There is no reason to believe that the most flexible and adaptable economy in the world can’t do the same.”