Nov. 16, 2009 – 9:42 a.m. CT

A Credit-less Christmas

Retail sales rebounded at a startling 1.4% pace in October, after the data for September was REVISED DOWN sharply. On net, the retail recovery remains extremely fragile, with revisions likely to remain on the downside more than the upside in the months to come. Indeed, the preliminary data on retail sales (including that which was estimated) during the recession AND recovery, is likely to show a worse contraction in consumer spending once the full data is taken into account. (Preliminary estimates are very bad at capturing the impact of retail bankruptcies on aggregate consumer spending.)

The reason for the weakness should be fairly obvious: real incomes have fallen in the face of surging unemployment and rising energy prices, and the debt we once used to bridge those turbulent waters is drying up. Everything from a contraction in the overall number of lenders in the market, to consumer credit to tighter standards, are inhibiting credit. Then, as if to add insult to injury, the Federal Reserve announced today that it is raising fees and lengthening the shelf life of gift cards which will no doubt limit the attractiveness of issuing those by lenders.

Indeed, the only things we have going for us are pent-up demand and a small cushion of savings, which was built over the last year. Any hopes for the gains in October to be carried into the vital holiday shopping season are contingent upon consumers tapping into those savings.

This, coupled with a push by retailers to dampen and delay holiday promotions, sets the stage for a fairly aggressive game of chicken between retailers and shoppers. My money is on shoppers, and I don't consider myself a risk taker.

© 2009 Mesirow Financial Holdings, Inc. ("Mesirow Financial"). All rights reserved.

The information in Diane Swonk's Fed Flash is the proprietary and copyrighted material (the "Copyrighted Material") of Mesirow Financial. The Copyrighted Material, or any portion thereof, may not be reproduced, retransmitted or submitted to any media outlet, or posted on any Web site aside from mesirowfinancial.com without the express written consent of Mesirow Financial. This information provided here in is believed to be obtained from sources deemed to be accurate, timely and reliable. However, no assurance is given in that respect. The reader should not rely on this information in making economic or other decisions. The views expressed herein are those of the author and may not necessarily represent the views of Mesirow Financial, its operating businesses or other of its employees. This communication does not constitute an offer or solicitation, or solicitation of any offer to buy or sell any security, investment or other product. Likewise, this communication serves to provide certain opinions on current market conditions, economic policy or trends and is not a recommendation to engage in, or refrain from engaging, in a particular course of action.