Anyone paying attention to U.S. consumer is betting on a bleak holiday season. While inflation concerns of the spring and summer have abated, the troubled housing sector, unsteady stock market and swelling unemployment continue to batter Americans' collective financial psyche and crimp spending. The Federal Reserve is expected to slash its benchmark interest-rate target once again on Wednesday to help get the financial system back into gear -- and lending to buyers and sellers again, at lower rates. But with all the headwinds facing the U.S. consumer, his gloominess is unsurprising. "A few months ago Santa Claus couldn't afford the gas to come; now his credit card is maxed out," says Vicki Bryan, senior analyst at GimmeCredit. The Conference Board on Tuesday said it was unsurprising that its consumer-confidence index dropped further, though the extent of the decline was far worse than analysts expected. In October, the consumer-sentiment reading was 38, down 38% from the previous month and down 60% from the year-ago level. Analysts had expected a reading of 52, on average. Lynn Franco, director of the Conference Board's consumer research center, attributed the decline to the global financial crisis, which has saturated most media coverage for the past few weeks. "Looking ahead, consumers are extremely pessimistic," says Franco, who notes that Americans' outlook for employment, inflation and financial health has also become worse. "
This news does not bode well for retailers who are already bracing for what is shaping up to be a very challenging holiday season."
An October Christmas sales forecast by Gallup suggests that this season may be worse for retailers than the one following the 1990-1991 recession. And recent polling by the group shows that two-thirds of Americans feel they have been hurt by the financial meltdown, with 70% believing they will suffer financially over the long run. It's important to note that consumer confidence does not correlate perfectly with spending or other economic indicators. But action seems to be catching up with negative sentiment, as retail spending declined 1.2% last month, the sharpest drop since February 2006. While holiday sales will certainly not be stellar this year, they also might not be the lowest on record. Results will hinge largely on whether the government intervention to kick-start the financial system will actually spur lending, production and job growth. Indeed, the employment picture appears bleak in most sectors of the economy, as businesses downsize to deal with the downturn and job cuts announced earlier this year started to take shape. Housing, financial and manufacturing companies grabbed headlines earlier this year as they made major slashes to their collective workforce. The cuts have not yet abated, as the unemployment rate hovers near 6%, and several major firms, including Goldman Sachs ( GS - Get Report), Bank of America ( BAC - Get Report), General Electric ( GE - Get Report), Xerox ( XRX - Get Report), Whirlpool ( WHR - Get Report) and Coca-Cola ( KO - Get Report) have all announced more cuts in recent weeks. The news signals a further climb in the unemployment rate going forward. "If your job is in jeopardy, I hate to say nothing else matters, but really it doesn't," says Betsy Gelb, a professor at the University of Houston's Bauer College of Business. "Your ability to pay your mortgage is certainly job dependent. And OK, your house is worth less, but if you're not planning to sell it tomorrow, it's not as big of a concern. Your perception of risk to your job is just fundamental to your confidence as a consumer."
But even if a reversal of recent employment statistics alone could turn around consumer sentiment, such a reversal still hinges upon businesses' ability to expand, which in turn hinges on the financial sector's willingness to lend. Credit markets have shown signs of thawing and the White House is pressuring banks to use their government-issued capital to make loans, but many economists say an economic upswing is not likely to come until well into 2009. "Anybody who's reading tea leaves," says Gelb, "will find the tea leaves are damp and brown." Gallup research indicates that the bailout plan for the U.S. financial sector -- and political bickering over the bill -- made matters worse. But, ultimately, the unprecedented federal intervention had "a marginally positive impact," according to Chief Economist Dennis Jacobe. Positive signs on several economic fronts are helping to soften recent blows to the battered consumer psyche - from notable increases in home sales, to a thawing in the credit markets, to the government putting pressure on banks to start lending to consumers and businesses again. "Hopefully, these positive trends should help to mitigate -- at least to some degree -- the severity of the full-fledged recession as it rolls out," Jacobe says in a recent blog post. Uncertainty surrounding the country's economic future will be further eliminated once the November elections have passed, says Greg Daugherty, executive editor of Consumer Reports. Indeed, most Americans -- 80% according to Gallup -- do not believe the Bush administration can adequately handle the economic mess.
"Either way it goes, some people are going to be happy, some people are going to be unhappy," says Daugherty. "But just having a sense that there's a government again with a strategy is going to give people confidence. Not only do we have a lame duck, we have the lamest duck there's ever been." Daugherty notes that while many economists predict a moderate-to-severe U.S. recession, the country has rebounded quickly and aggressively from downturns of the past. Most were eight to 10 months, he says, while the deep recession of the 1970s lasted about a year and a half. "They don't last forever," says Daugherty. "People sort of get in the mindset that we'll be in this for the rest of our lives, but it never turns out that way."