NEW YORK — Laden with pessimism, consumer confidence took another nosedive in October. But analysts are still expecting holiday sales to show decent year-over-year gains.
In data released by the Conference Board on Tuesday, consumer confidence fell for the second straight month. The Consumer Confidence Index now stands at 85, down from a revised 87.5 last month. Economists had expected the index to inch up to 88.
Regarding the components of the overall index, the Present Situation side dropped to 108.2 from 110.4 while the Expectations component fell to 69.5 from 72.3 last month.
“Much of the decline in confidence over the past two months can be attributed to the recent hurricanes, pump shock and a weakening labor market,” said Lynn Franco, director of the The Conference Board Consumer Research Center, in a statement.
She said while consumers’ assessment of current conditions remains above readings from a year ago, their short-term expectations are significantly below last October’s level.
“The degree of pessimism, in conjunction with the anticipation of much higher home heating bills this winter, may take some cheer out of the upcoming holiday season. In order to avoid a blue Christmas, retailers will need to lure shoppers with sales and discounts,” Franco noted.
While there’s a perception that retailers will feel some pinch from curtailed holiday spending, there’s also a belief among some analysts that consumers won’t necessarily slow down the pace of their spending. Archstone Consulting, for example, is forecasting a sales gain of 3 to 5 percent over 2004 for the retail sector.
“Consumer confidence is bad. The total mood has soured big time from nine months ago. They don’t like the direction of the country and don’t like the fact that we’re still at war. But the consumers are still shopping,” said Richard Hastings, retail analyst at Bernard Sands.
Hastings believes that holiday sales will hold up. He said even with higher energy costs, many consumers have moved to fixed monthly payment plans, which helps them avoid sticker shock in the winter months when heating bills rise. Fixed payment plans also give consumers flexibility to take on extra debt during the holiday season.
On Monday, the National Retail Federation also said it doesn’t expect consumers to pull in the reins on holiday spending. In its 2005 Holiday Consumer Intentions and Actions Survey, conducted by BIGresearch, the NRF said the “average consumer plans to spend $738.11 this holiday season, up 5.1 percent from the previous year.” NRF said the survey results are in line with its forecast last month, which projected total holiday retail sales to increase by 5 percent over last year to $435.3 billion.
“Just as retailers plan for holiday sales and promotions, consumers plan ahead and budget for the holidays,” said Tracy Mullin, president and chief executive officer of NRF, in a statement. “With extra money tucked away to spend on what’s important, shoppers will be hitting the stores and spending on their loved ones, and on themselves.”
Within the retail segment, Archstone is expecting apparel sales to rise 5 to 7 percent, while the NRF survey found that clothing is a gift favorite, with 54.4 percent of consumers surveyed saying that they hoped to receive apparel or accessories as a gift this year.
UBS economist Maury Harris in a research note observed, “Given that gasoline prices have fallen sharply in recent weeks, and the trend in employment growth, which still appears strong, we expect confidence will likely recover soon.”
In the end, though, it is consumers’ perception of how well they’re doing that will likely determine their willingness to shop. Consumer spending accounts for two-thirds of the economic activity in the U.S. Their lack of an optimistic outlook for the labor market suggests that there might be issues brewing in 2006. And while some economists say the job market is still good, consumers have a diverging perception of it.
In this month’s consumer confidence survey, those who expect more jobs to become available in the coming months declined to 12.2 percent from 14 percent. Meanwhile, consumers who anticipate their incomes to increase in the months ahead fell to 16.8 percent from 18.1 percent last month.