FRED SHERMAN
Debt increasing

Despite a weak economy, experts say consumers will be flush with holiday cheer – and purchasing power – in the weeks leading up to Christmas. That, in turn, has some experts concerned about the months following the holiday season, when shoppers will be dealing with increased debt.

Recent holiday spending surveys have concluded that shoppers will be more conservative this holiday season, but economists and industry analysts nevertheless expect gift seekers will increase their credit limits and take full advantage of their purchasing capacity.

“I didn’t see any recession at Foxwoods Casino when I was there last week, and I couldn’t find a parking spot at the mall yesterday,” said Fred Sherman, chief economist at Philadelphia-based Sovereign Bank, which has an extensive Massachusetts branch network. “The sales are tremendous and you have to buy … if you need anything, you have to buy.”

Despite the mall crowds and high rollers, some consumers do say they intend to cut back their holiday spending this year, according to the third annual holiday spending survey sponsored by the Consumer Federation of America and the Credit Union National Association. According to the survey conducted in early November, 21 percent of the 1,000 adult Americans surveyed said they would spend less this holiday season and 40 percent would pay off their debt if they happened upon a windfall of $5,000.

But few consumers are likely to see such a windfall, and Sherman said that increasing debt may become a serious problem with many Americans. The larger concern for creditors may be with the growing number of people in debt and not necessarily the amount of money they owe, he said.

“Bankruptcy is at the highest level of all time, and it’s too easy for people to just spend and declare bankruptcy. I think we’ll have record bankruptcy [this year], but I think the banks are preserving for it,” said Sherman. “You have to help the people but the people aren’t helping themselves.”

And this season, as with past years, credit counselors are warning consumers of the pitfalls of spending in an effort to help them avoid overspending and excessive debt that could eventually lead to bankruptcy.

In past years, savings programs offered by credit unions and banks known as “Christmas Clubs” have helped clients save money for the holidays by promoting monthly savings plans beginning at the start of the new year. But such programs are waning, and for those shoppers who have not planned so far in advance, the best advice may be to shop wisely.

Credit counselors are this year are advising consumers to be smart and read the fine print, because the long-term consequences of some purchases can outweigh the cheerful holiday spending spirit.

Robert Kimmett, senior vice president of marketing at the Massachusetts Credit Union League, said the “consumer-oriented mandate is that people spend carefully and still enjoy their lifestyle.”

According to Kimmett, the “Christmas Club” savings plans are fading to some extent, mainly because the demand for the specialized plan has faded resulting in less promotion.

“There is a dedicated savings program for people because some people feel they need the discipline,” said Kimmett. “The ‘Christmas Club’ idea hasn’t been replaced, but whatever people choose to use as a purchasing method needs to not trigger a lot of interest expense.”

‘Practical Decisions’

According to the CUNA survey, 65 percent of consumers are not concerned about paying off credit card debt from holiday spending because they intend to exercise purchasing restraint.

While over half the consumers surveyed said they intend to use a credit card for holiday purchases, only 26 percent say they will charge most of those purchases.

But credit counselors are wary of consumers’ ability to stick with such plans and emphasize the importance of maintaining, and sticking to, a realistic budget.

“Historically, we see a drop-off of new clients around the holiday season because when you go into credit counseling your [credit card] accounts are automatically closed, so people wait until January and February to sign up,” said American Consumer Credit Counseling Client Services Supervisor Robert Herrick. “We always warn our clients because the holidays are the roughest times and they are going to get inundated with store cards … If they are a credit counseling client, they will be dropped from a program and then they are looking at higher payback rates.”

After reviewing the market trends for Massachusetts credit unions this year, Kimmett said there is a specific theme that the majority of people are adopting – “we have a life to lead.”

“We’ve been in a situation where the economy has been less than stellar in the past two years,” said Kimmett. “If [consumers] were particularly vulnerable at one point, that impact has already hit them and if not, they have probably already thought through the impact of their investments and cash flow.”

But even in a downward economy, analysts said the retail industry has survived and will continue to thrive through the holiday season and into 2003.

“Economic news is setting a trend that maybe the retail movement is sustainable – it is moving at a slow-moderate pace but not moving backward. Everyday someone downsizes somebody, but it looks like we’re getting better consumer news,” said Sherman. “Starting with retailers, some were upgraded and forecasts for 2003 are looking better.”

While many shoppers have not abandoned the spirit of the season but instead pledged to be more practical with their gifts, the day of truth awaits when the biggest shopping season of the year comes to an end and the retail industry announces its sales numbers.

“People are going to be showing, attitudinally, more restraint,” said Kimmett. “It’s really hard to tell when the moment of truth comes, but I think people are probably going to be making more practical decisions to please their families and friends, instead of the extravagant gifts purchased in the past.”

For retailers, an upside to CUNA’s survey is that consumers are not as cautious going into this year’s holiday season as they were last year, after the tragedy of Sept. 11, 2001, shook consumer confidence. However, economists agree that government decisions will play a part in retail spending.

Sherman said if the situation with Iraq is still on hold as of Dec. 8 – the definite date for Iraqi and United Nations peace agreements – and there is no real action toward war, “I think we’re going to have a great Christmas.”

But Sherman said if there is conflict that is concluded quickly, that would create a “tremendous uplift” for the market.