Dreaming of a Lean Christmas

Good news: It’s shaping up to be a mildly disappointing Christmas for U.S. stores. That’s a promising sign for consumers.

The National Retail Federation expects holiday sales to fall 1% this year after a 3.4% drop last year. Stores won’t suffer like last year, though. Most retailers have reduced inventories by 10% to 20%, reckons Standard & Poor’s. Companies that make “consumer discretionary” items (things we want but don’t need) have sharply reduced costs this year, so although most of their sales figures aren’t growing, the group is expected to report fourth-quarter profits of just 6% below 2007 levels. In last year’s fourth quarter, consumer discretionary companies reported a loss.

Stock prices have shot 60% higher from their March low. House prices have stopped plunging, and in some areas they are creeping higher, at least for now, thanks to a buffet of perks for buyers, both new ($8,000 tax credit, artificially low interest rates) and old (tax breaks on mortgage interest, artificially low down-payments for first-time buyers). Unsurprisingly, rising asset prices have led to a rise in consumer sentiment over the past year.

We’d be in deep trouble, though, if consumers were turning their slightly better mood into an excuse to shop with abandon. The unemployment rate is about three percentage points higher this year than last. Americans owe $2.5 trillion in consumer debt and $14.5 trillion in mortgages, against an income of $11 trillion a year after taxes. The government owes another $7.7 trillion on the people’s behalf, counting only debt held by the public. These numbers aren’t yet unmanageable, but we don’t want them growing worse.

They’re not. You might have heard that U.S. consumers spent more than they made in 2005 and 2006 for the first time since the Great Depression — that is, that the nation’s personal savings rate turned negative. That used to be true. The Bureau of Economic Analysis recently made significant revisions to the data, which it does every five years or so. (Read all about it.) The new numbers show that the personal savings rate bottomed in the third quarter of 2005 at a positive 1.2%. That’s still low; the average since 1929, using the new math, is 7.4%. But during the first three quarters of this year, consumers saved at an average rate of 4.5%. Consumer and mortgage debt has dropped in recent months. (No such luck with government debt.)

Consumers seem to be doing more of the right things, whether out of necessity or prudence. Retail analysts figure more parents are skipping presents for each other, while still spending on the kids. They expect that fewer shoppers will pick up gifts for themselves during this year’s shopping trips. Early forecasts call for personal savings of close to 4% next year. That’s high enough to shrink debt a smidgen more without damaging the economy. Growth-obsessed economists sometimes say a spending downturn is a bad sign because personal consumption makes up 70% of gross domestic product. It shouldn’t be that high, though. The average since 1929 has been less than 65%.

So let me be the first to wish everyone a cheap holiday. It might be better to give than receive, but when shoppers are already $17 trillion in the hole, it’s best to save.