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Holiday Cheer

The economic forecast looks bright for the Christmas season.

11:00 PM, Nov 27, 2006 • By IRWIN M. STELZER
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ROSY SCENARIO may be the belle of the Christmas ball, but she is due to be replaced by her only slightly less ebullient cousin, Goldilocks, in the New Year. In business-press jargon, all signs are that retailers here will have a merry Christmas, to be followed by a slowing but still healthy economy in 2007.

Consumers are in a rather good mood, much cheerier than at this time last year, according to the University of Michigan Consumer Sentiment Survey. With reason, according to the Bush administration, which released its updated economic forecast last week. Although revised down from earlier guesses to reflect the housing slowdown, the projections paint a far-from-gloomy picture. Inflation-adjusted growth is expected to come in at 3.1 percent this year, and 2.9 percent in 2007. Perhaps more important, real wages have finally started to rise noticeably--a full-time production worker will take home almost $1,000 more than he did last year. That won't end the debate that is raging about inequality, especially since Wall Street firms are about to hand out multi-million-dollar bonuses and investigators are digging into corprocrats' practice of backdating their options, but it should make most consumers feel in a spending mood in the next few weeks.

It is increasingly difficult to predict sales during the Christmas shopping season because that season no longer has clear starting and end points. In days gone by we believed the starters' gun for shoppers went off on what was called "Black Friday," the day after Thanksgiving when retailers' red ink turned black. And it was indeed true that many consumers were lined up at shops and malls that opened at midnight, Thursday, giving the hardiest shoppers only a few hours to digest their turkey dinners. But many customers had by that time already done some of their shopping--the retailers call it "holiday creep"--and others bought gift cards, which now account for 5 percent of total sales. Some $20 billion of these cards won't be cashed in until next year, and therefore won't be counted in this season's sales totals.

That said, the current state of consumer confidence has historically been associated with year-on-year seasonal sales growth of between 4 percent and 8 percent. A tally of store tills over the weekend suggests that sales were estimated as being up somewhere between 6 percent and 19 percent over last year. With gasoline prices down, incomes up, discounts available on all sorts of goods, from flat-screen televisions to Elmo toys (toy prices are down about 40 percent from levels five years ago), the National Retail Federation guessed that 137 million people stormed the shops between Friday and Sunday. Retailers, expected by consultants Challenger, Gray & Christmas (that's right) to hire some 700,000 people to make certain that customers are being served, will find margins reduced by price cutting, but they won't be left with costly inventories of unsold goods.

If the consumers do splurge, they will be handing most economists a bit of a surprise. Most professional forecasters and practitioners of the dismal science are convinced that the recent decline in house prices will dampen consumers' willingness to spend. Todd Lavieri, CEO of Archstone Consulting, predicts that sales this season will top last year's by only a modest 3 percent, in part because of the effect of the decline in the housing sector and in part because this will be "a line extension Christmas," with no new blockbuster products to tempt the so-called early adapters.

Whatever the sales total turns out to be, traditional department stores are likely to regain some market share, especially if apparel sales (especially of jeans and sweaters) grow as expected. Wal-Mart is struggling to top last year's performance, while Nordstrom's, Neiman Marcus, and Macy's have gotten their stores smarted up and their offerings more in line with what consumers want to buy.

When Rosy has had her twirl around the shops, Goldilocks might take over. Start with this: the Bill & Melinda Gates Foundation revealed in last week's SEC filing that it has taken positions in seven home-building companies, including WCI Communities, a small builder active in the weak Florida condominium market. This puts the Gateses in line with two-thirds of the economists surveyed by the Wall Street Journal. They agree with former Federal Reserve Board chairman Alan Greenspan that the worst is over for housing, or soon will be, and that the run-down in inventories, lower prices, and strong demographic trends portend a snap-back sometime in 2007.

That would do a great deal to make the White House forecast of 2.9 percent growth prove a bit too pessimistic. With Fed chairman Ben Bernanke apparently satisfied that the economy has slowed sufficiently to make further interest rate increases unnecessary, and a softening dollar spurring exports, the table is set for Goldilocks to experience an economy that is not too cold, not too hot, but just right.

There is more good news. Rob Portman, the former U.S. Trade representative who was promoted by the president to run the important Office of Management and Budget, was so eager to get the administration's story out that he had me around for a lunch of fruit salad, data, and charts. The charts show that the nation's fiscal position is rather stronger than most analysts realize: the federal budget deficit will fall below 2 percent in 2006, and decline after a 2007 blip to under 1 percent. Portman is also optimistic that the president will be able to head off the new protectionist pressures likely to come from a Democratic Congress and that Bush's growth-inducing tax cuts, which Portman emphasizes have increased the portion of total individual income taxes paid by the top 5 percent of earners, will survive the new Congress.

No sunny economic outlook is ever entirely free of clouds, of course. Higher spending for Iraq will put pressure on the budget and deficit; OPEC might decide to cut output enough to drive crude prices back closer to $70 if the U.S. economy, and with it oil demand, start to grow rapidly; a dollar collapse might force the Fed to raise interest rates.

But for the moment, 'tis the season to be jolly.

Irwin M. Stelzer is director of economic policy studies at the Hudson Institute, a columnist for the Sunday Times (London), a contributing editor to The Weekly Standard, and a contributing writer to The Daily Standard.