Retailing's Ho-Hum Holiday

By Christopher Byron

Fears of renewed recession cause a sluggish start for Christmas buying

Nothing would give the wavering U.S. economy more of a holiday spirit pick-me-up than an old-fashioned yuletide spending spree. The brief period between Thanksgiving and Christmas is the most important time of the year for many retailers, who can often earn up to 50% of their annual profits during those four or five weeks. But with the 1980 Christmas shopping season almost half over, prospects are steadily dimming for the sort of year-end stampede that might help prevent the economy's slipping back into a slump early next year.

Surveys by both the University of Michigan and The Conference Board, a Manhattan-based research institute, show that consumers are now in a more confident buying mood about the economy than they were last spring, when the prime interest rate rose to 20% and the economy was in a very sharp recession. Yet that feeling may be shifting quickly.

Interest rates are again climbing. Major banks last week raised the prime interest rate, the amount they charge ma jor corporations, to 19%, or one percentage point short of the spring peak.

The rise seems to be making many consumers more hesitant and fearful of another economic downturn. Says the Commerce Department's Adren Cooper:

"Consumers today are more conscious of the rising cost of money and all the talk of another dip in the economy. We don't see them going out on any limbs. They're remaining cautious." And Robert T. Parry, chief economist for California's Security Pacific National Bank, says that consumers are approaching the holiday season fearful of "possible unemployment, inflation and higher Social Security taxes coming soon after Christmas."

The calendar has shortchanged retailers this year. There are only 26 shopping days between Thanksgiving and Christmas, as compared with 32 days a year ago. To offset the fewer business days, merchants in many areas of the country are hoping for cooler weather. Cold and especially snow remind shoppers that Christmas is near and help business. Traditionally, nothing hurts December sales more than soft, balmy weather.

For a fortunate few stores, business has never been better. Demand is strong for almost any sort of electronic gadget, from programmable calculators to video games. Sales of computer-based "smart toys" like Simon, which uses increasingly complex patterns of flashing colors and sounds as a space-age update of the old Simon Says schoolyard game, are especially robust.

Business is also booming for carriage trade retailers like Neiman-Marcus of Dallas and Saks Fifth Avenue. For weeks, their branches have been brisk with crowds of well-heeled shoppers. In Bloomingdale's flagship store in Manhattan, free-spending shoppers are readily paying $545 for Burberry trench coats or $1,000 for life-size hand-carved replicas of China's eight immortal mandarins. At the Younkers department store in Omaha, one customer recently bought seven Yves Saint Laurent blouses as gifts for $400 each.

But retailing to the less affluent is now harder. The ongoing ravages of inflation have cut off 4.2% from the purchasing power of the average paycheck in the past year. Says Chicago's Leo Shapiro, a consumer research expert: "There is real resistance to spending out there. People are entering the Christmas season deter mined to spend less than they did last year. They have more expenses, less cash; and they are resolved to keep more in their pockets."

With installment loan rates now reaching levels of 18% to 20%, fewer and fewer people are willing to buy on time. As a result, the pace at which families have been piling up more loans is slowing.

The nation already has a burdensome mountain of nearly $305 billion in consumer debt, but the growth has slowed sharply. In September consumers increased their borrowing by only $1.5 billion, or about one-third the rate of the same period a year ago.

In contrast to Christmas seasons past, the spirit of "give a gift, any gift" has wilted. This year the emphasis is on what the poet Dylan Thomas, in A Child's Christmas in Wales, called "the useful presents." Electric blankets, at retail prices of anywhere from $49.50 to $185, are selling well. So too are classically styled wool and cashmere sweaters. Demand remains strong even for premium-price gifts like food processors.

Value is a key word for many shoppers this year. Consumers are looking for products that might cost a little more to buy but which last much longer. Some experts say that this is caused by the American shift to a more European style of living and a desire to own fewer, but better built, things. Says George Core, a vice president of Rike's, a department-store chain in the Dayton area: "The customer is value-conscious and will buy items like microwave ovens, even though the gift is expensive. Warm sweaters and winter coats are good this season, and customers are looking beyond the Christmas holidays to items that will be needed in the months ahead."

The traditional Christmas splurge presents, everything from cameras to catcher's mitts, are hardly moving at all. Sales have stagnated for photographic equipment and hardware items. Toy sales in general have been weak this year. Concedes Douglas Thomson, president of the Toy Manufacturers of America, which represents about 90% of the industry: "Toys are the last thing to get hit at Christmas because parents take the attitude that kids should get a toy no matter what. Yet most toymakers now feel that they'll be doing well if they can simply break even with last year."

Many families trying to keep up their living, and Christmas, standards have discovered a new ally: their home. As inflation has driven up the cost of housing, from a 1974 average of about $36,000 for a typical single-family dwelling to more than $73,000 currently, many homeowners have begun using second mortgages to cash in on the unrealized wealth. Interest on the loans varies anywhere from 15% to 19%, and the lending period ranges from ten to 15 years. That makes the loan more expensive and shorter in duration than the traditional 25-to 30-year first mortgage, but it is cheaper and available for longer periods than are funds raised through installment borrowing.

Second-mortgage financing, which once was about as respectable as borrowing money from people in dark alleys, has become a hot new growth sector in banking. An estimated $20 billion in these loans is currently on the industry's books, with some 50% of that having been added in the past year alone. New Jersey's City Federal Savings and Loan Association, the nation's 25th largest thrift institution, has nearly tripled its second-mortgage portfolio, to $118 million, during the year. United Jersey Bank, a leading commercial bank lender in the state, has been trying to expand its loan business with hucksterish newspaper ads that advise readers: "Go ahead. Add a room, take a trip, pay old bills, with money from home."

Much of the money from second-mortgage financing is used by borrowers to pay off existing installment loans that might have been built up last Christmas, for example. Yet an estimated one-third of the funds goes directly into the economy as new spending. Experts believe that consumer expenditures would have been sharply lower during the past two years without the extra push provided by second mortgages.

But will homeowners continue bor rowing against the equity in their dwellings while interest rates on second mortgages reach toward, and in some states exceed, 20%? It is doubtful, but econo mists and bankers are divided. Says Mil ton Hudson, a senior vice president of New York's Morgan Guaranty Trust Co.:

"In the last several years people borrowing against the increased value of their homes has been important, but at cur rent interest rates that has dramatically declined." Yet Gilbert G. Roessner, chair man of City Federal Savings and Loan, retorts: "My guess is that even with higher interest rates, the growth in second mortgages is likely to accelerate rather than slow down."

In the past two years, Christmas sales began sluggishly but then ended strong.

Merchants this year are hoping for a replay, while worrying about the worst. Says William Friedman, president of Younkers department store: "It's starting slowly, but we are optimistic about last-minute spending."

-- By Christopher Byron. Reported by William Blaylock/Washington, with other U.S. bureaus

With reporting by William Blaylock

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