Praying For Santa

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The crippling snow may have kept some Midwesterners away from the stores last week, but no one can blame the weather for the sparse crowds at Southern California malls. In sunny West Los Angeles, the Westside Pavilion was a virtual ghost town, and the few people wandering through other malls weren't exactly spreading the wealth. "I used to go into debt every year and spend six months digging out," says Susan Ray, an executive assistant. "I don't want to do that anymore."

Neither, it turns out, do a lot of other Americans--which is why, after years of getting fat as Santa in December, the nation's retailers are very hungry. Their customers, faced with a slumping stock market, rising energy prices and a crushing debt load, aren't the free spenders who fueled booming holiday seasons past. Psyched out, tapped out and even shopped out--How many cell phones and cashmere scarves do you really need?--they are making this holiday, as a Los Angeles boutique owner puts it, "ho ho hum." "Some CEOs haven't seen it this bad since 1990-91," says Peter Schaeffer, a partner at Ernst & Young.

Sales are running below expectations, and jittery merchants--most of whom make a quarter of their annual sales during this critical time--are slashing prices earlier than ever before. Apart from the Barbie Volkswagen and the Sony PlayStation 2 game machine, there aren't many must-have items. And when consumers do spend, it is increasingly for services--such as trips, parties or a day at the spa--not for old-fashioned goods. "Shopping as bingeing is over now," says Kurt Barnard of Barnard's Retail Trend Report. "Consumers won't buy frivolously or on a whim. They'll buy what they need."

So far, at least, that's not too much. Consumer spending in October rose a paltry 0.2%, and during the second week of the holiday season, sales at specialty stores in malls were down nearly 10% from a year ago, according to the International Council of Shopping Centers. Sears has moved its after-Christmas sale to the week before, urging shoppers that this is "no time to fool around." Everyone from the Gap and Victoria's Secret to Circuit City, Wal-Mart and Home Depot is feeling the pain. Even online shopping isn't growing as fast as expected. Last week eToys announced its sales were lower than expected and it may run out of money in the spring. "For the consumer," says Richard Berner, chief U.S. economist at Morgan Stanley, "the negatives are beginning to outweigh the positives."

Last week's bad news showed just how much. Retail sales fell 0.4% in November, led by the biggest drop in car sales in more than two years. Both UPS and FedEx reported that holiday shipments are slackening, while Microsoft and Compaq became the latest tech titans to blame poor earnings on a slowing home-PC market. Consumer sentiment about the economy, as measured by the University of Michigan, is at a three-year low. Given the drubbing on Wall Street this year, that's not surprising. As the NASDAQ soared in the past few years, the market created a so-called wealth effect, emboldening people to throw money around freely. That was before $2 trillion of their equity was wiped out this year.