Inside Iowa State

Nov. 21, 2008

Experts predict a rough holiday retail season

by Anne Kassel, News Service intern

While the National Retail Federation's recent survey of 8,100 members found that the group expects a 2.2 percent increase in holiday shopping from 2007, two Iowa State economic experts disagree. They project a decline in retail sales this holiday season, with smaller businesses feeling more of the economic pain.

"This holiday season is the 'perfect storm' for retailers," said Meghan O'Brien, an economist with the Regional Capacity Analysis Program. "Trade groups have predicted a sales increase of about 2 percent from last year, which is about half of the 10-year average. I think this is ambitious and overly optimistic."

Consumer spending has been declining for more than a year, O'Brien said. She sees the country's financial crisis, increasing inflation and a recessionary economy as reasons for lowered expectations.

"Even if we had the best-case scenario and sales increased by 2 percent, it wouldn't be enough to save many retail businesses," O'Brien said. "Most retail businesses have seen their input costs and overhead increase by 5 percent. For those retailers hoping the holiday season will save their business, there will be considerable disappointment."

Associate professor of economics Joydeep Bhattacharya shares O'Brien's holiday retail concern. He said consumers typically save more and spend less during times of economic strife.

"In times of uncertainty, people increase their precautionary saving -- the saving for the rainy day," said Bhattacharya, who has research expertise in monetary theory, credit market imperfections and bank panics. "Businesses will try to cut profit margins and offer deals to shoppers, but they are so constrained. Their pockets aren't as deep as they used to be and the deals will not be as good as they have been in the past."

O'Brien said specialty and high-end retailers especially will struggle, likely producing more store closings and bankruptcies in those areas next spring.

"Discount retailers will do well comparatively," she said. "However, with everyone having less disposable income, they won't make up for the losses in other areas of retail."

"I predict a lot more of the holiday shopping will be done at places like Sam's Club and the big online retailers," Bhattacharya said. "Historically, entertainment has been somewhat recession-proof. Upmarket stores, such as Macy's, are likely to take a hit, as are upmarket items such as designer outfits and shoes."

In her report, Retail Economics 101: Lessons and Strategies of a Recession, O'Brien wrote that it is not only possible, but probable that the retail sector will not meet the National Retail Federation's holiday retail forecast, which is its weakest in six years.

"This will mean significant hardship for many Iowa businesses and communities," she said.

"This holiday season is the 'perfect storm' for retailers."

-- Meghan O'Brien