AMES, Iowa -- Economists say that the country's recession ended in the third quarter of 2009 and a recent USA Today poll indicated that many now see signs of recovery on the economic horizon. But Meghan O'Brien, an economist with Iowa State University's Regional Capacity Analysis Program, doesn't necessarily share that vision in Iowa retail's near future.
She wrote that the prospects for the holiday retail season "remain bleak" in her "Retail Forecast: Holiday 2009" posted at: http://www.econ.iastate.edu/research/webpapers/paper_13119.pdf.
Laura Smarandescu, an assistant professor of marketing in ISU's College of Business, also projects a sales decline for holiday retailers. But that may give consumers the shopping edge.
"In 2009, consumers are likely to have an advantage over retailers," said Smarandescu, who researches consumer decision-making, including an upcoming study on how consumers value gift cards over cash. "Price competition between retailers is strong and consumer demand has weakened due to tougher economic conditions. There is simply less money to go around and the competition for those dollars should provide consumers some deals."
While the 3.5 percent rise in the country's third quarter Gross Domestic Product (GDP), by definition, brought an end to the recession, O'Brien reports that GDP is not useful in predicting consumer behavior or reflecting "real recovery" in the short run. And she points out that much of the growth in GDP in the third quarter was artificially fueled by government spending through stimulus money and programs like "Cash for Clunkers."
Lagging indicators don't support consumer spending
She says real recovery requires the so called "lagging indicators" -- such as employment, wealth and income -- to all see improvement. And since that hasn't happened yet, as evidenced by last week's report of a national record 10.2 percent unemployment, don't expect consumers to suddenly start spending this holiday season.
"Without growth in these areas, not only will households face the real threat of not being able to afford their basic consumer needs, but those that still have employment will respond to the uncertainty by saving more money and consuming less," wrote O'Brien. "This is the Paradox of Thrift, where consumers acting rationally to economic incentives reduce consumption and increase their savings rates, deepening the recession.
"The average consumer cannot feel GDP growth in the short run and therefore will not be motivated to spend more this holiday season based on the news," she continued.
The National Retail Federation is projecting a 1 percent decline in holiday sales from last year. But O'Brien calls that projection "optimistic," given the economic climate and consumer confidence levels. She reports it is more likely that holiday sales -- excluding gasoline and automobiles -- will experience a 3 to 3.5 percent decline from last year.
"With lack of credit access, unemployment rising, consumer confidence shaken, and incomes falling, sales will fall," she wrote. "With the majority of Americans declaring that they will spend considerably less this year, it is unlikely people will adjust their planned spending upwards in December. Although Iowa and the U.S. as a whole will not have the same decline in retail sales, it is to be expected that Iowa's decline will not differ substantially from the national average."
Smarandescu forecasts a holiday sales increase in one area -- online shopping -- starting with Black Friday and Cyber Monday deals. But those sales may still yield smaller retail profits.
"As in 2008, large retailers will have their Black Friday and Cyber Monday items available online," she said. " Although traditional retail shopping is likely to slow down, as more and more people turn to online shopping, I predict that online shopping volume will increase. Margin-wise, profits will be reduced due to increased online price comparison."
She says the availability of the Black Friday/Cyber Monday promotions online will reduce the amount spent by at-home shoppers because they can do a quick online comparison of deals offered by different retailers, while avoiding other sales temptations found in the stores.
Layaway options make a holiday return
Some of those deals now include a return to layaway options. Burlington Coat Factory, Kmart, Marshalls, Sears, T.J. Maxx and Toys R Us are among the retailers offering layaway programs, and a growing number of Web sites have jumped into the business. Smarandescu calls layaway a great holiday tool for retailers because it encourages purchasing in two ways.
"First, layaways allow consumers to pre-commit to indulgence with little pain of paying," she said. "A lot of people feel bad about indulging and when faced with the decision, they postpone the purchase. But layaway allows people to justify an indulgence because at the moment when they first commit to the purchase, they only have to forgo little cash.
"Second, committing to purchase a product through layaway leads to greater satisfaction than waiting to make a full purchase due to a 'mere ownership effect,'" she continued. "That means that people who commit to a purchase through a layaway plan experience feelings of product ownership even if they don't yet physically own the product. They may imagine themselves using and experiencing the product."
Smarandescu reports that research on mere ownership effect shows people who hold a mug for as little as one minute are likely to rate it as more attractive than people who did not hold it.
But O'Brien's previous research has also found that layaways don't necessarily translate into greater sales profits.
"Under conditions of such economic uncertainty, layaway may not be enough of an incentive for consumers, especially for those too young to remember when it was most prevalent," she said. "For people worried about their employment situation, a wait and see attitude, rather than layaway, is likely to dominate.
"Additionally, I think consumers expect prices to drop
closer to Christmas so locking into a layaway contract right
now might not be optimal."
