Shoppers Forgo Basics to Buy Holiday Gifts

It's heart-warming, but is it sustainable? The answer, alas, is a resounding no.

Entering the fourth year of a post-financial crisis recession, consumers find themselves having to choose between basic necessities and holiday gifts. They appear to be making the emotional and traditional decision to salute the holidays and put off worrying about basics for now. It isa reminder of the strength of the economy that they still have the wherewithal to do so, despite the weak job market and stagnant income figures.

For business, however, the news that consumers increased spending, however slightly, is more ominous than positive. Given the choices consumers are making, this does not bode well for sales - and inventory levels - come the new year. JL

Conor Dougherty reports in the Wall Street Journal:

Consumers increased spending only modestly heading into the holiday season, failing to sustain momentum built in earlier months and often appearing to shift spending away from basics to pay for gifts.

Retail sales increased 0.2% in November from October, a muted pace compared with the 0.6% and 1.3% growth notched in the previous two months
according to a Commerce Department report Tuesday. Sales excluding motor vehicles—a less-volatile gauge—also grew 0.2%. The sales figures don't account for changes in prices.

Although the overall sales increase fell short of some predictions—economists surveyed by Dow Jones Newswires had forecast a 0.5% rise—consumers appear to be sticking to their holiday shopping.

But the numbers suggest that high unemployment and paltry income growth are prompting some tradeoffs in month-to-month spending.

For instance, several categories associated with holiday gift-giving grew briskly: Sales at electronics and appliance stores were up 2.1%, while nonstore retailers, a proxy for Internet sales, were up 1.5%. Sales at clothing and accessories stores were up 0.5%.

The weakness was in categories such as grocery stores, which fell 0.3%, and building materials, which also fell 0.3%. A category that includes restaurants and bars fell 0.3%, indicating that many consumers are trading service-sector purchases to pay for goods like electronics or couches.

"You have these bursts [of spending], but until income growth gathers steam they don't last," said Jay Feldman, a U.S. economist at Credit Suisse.

The economy—notably, consumer spending—has shown resilience over the past few months, despite the market turmoil sparked by Europe's sovereign-debt troubles. That has led a number of economists to increase their fourth-quarter growth forecasts to rates in the mid- to high-3% range, which would mark the fastest pace in more than a year.

Separately, the National Federation of Independent Business said its index of small business optimism increased for the third consecutive month, rising 2.8 percentage points to 92 in November.