The Mind Of A Shopper

By Daniel Kadlec

After 28 years as a flight attendant, the last few of which brought pay cuts totaling 30%, John Battelli decided it was time to move on. So last week he quit U.S. Airways--with an uncertain pension, mounting credit-card debt and hopes of growing his fledgling personal-trainer business. "My fear is that my ability to earn has fallen by the wayside," says Battelli, 53, of Westminster, Colo. As Christmas approaches, all that weighs heavily. "Come hell or high water," he says, "I'm going to make sure my children have the same holiday magic that I had as a child." He'll pay for the snowboard his teen son wants through "sheer will," and takes comfort in knowing he has a backstop of untapped home equity.

Yes, it's that time of year again, when the most prolific shoppers--and woeful savers--on earth, Americans, run amuck in stores as if they were Kris Kringle with his elves on strike. It matters little that shoppers are already neck-deep in debt or that even those doing well have cause for stress, given that sky-high home-heating bills are just a month away, inflation and interest rates are rising and the housing market is slowing--all of which is eating into most budgets or soon will be.

Yet shoppers are tossing aside such concerns, seduced by their image of what the holiday season should be, a buy-now-pay-later culture and price cutting that is so aggressive that when all is said and done, retailers may have sold a record number of things and still not made a dime. Heavy discounting is a dicey strategy, sapping profits and exhausting shoppers. An expected sale of $18 billion in holiday gift cards promises to keep the malls full in January. But then, says Ken Goldstein, an economist at the Conference Board (which tracks the marketplace), "we're in for a long winter's night."

For now, discounting is bringing shoppers out in force--literally. When a Wal-Mart in Cedar Hill, Texas, opened at 5 a.m. the day after Thanksgiving, known as Black Friday, Brittany Price, 19, was nearly trampled as she angled for a $68 DVD player. "I had to climb a display and hang on," she says. "It was funny watching people get so worked up over spending money. How often do you see that?" More and more often, it turns out.

"There is a large number of people, mainly women, who do not play sports or see much point in watching professional sports," says John Quelch, a professor of marketing at Harvard Business School. "They have a competitive spirit that manifests itself on Black Friday." Adding to the mayhem, says Lars Perner, a marketing professor at San Diego State University, is that "people are tired and frustrated" after skimping for months to pay higher gasoline bills. "It's like the people who diet," he says, "and then Christmas comes, and they overeat."

The bingeing began with a bang the day after Thanksgiving. The pace has since slowed, and the register isn't ringing much at stores like Nordstrom and Saks, which are struggling to project value and pizzazz. Not that they aren't trying. Nordstrom is offering to take your list over the phone, wrap every item and give you the whole bundle curbside. But service goes only so far when others are competing on price, says Paco Underhill, president of retail consultant Envirosell, who estimates that "10% to 15% of customers are walking out the doors of the mass merchants empty-handed."

Adding to retailers' worries is the fact that most shoppers aren't sure whether they should pop a cork or a Xanax. According to a TIME poll, 27% of respondents think the economy will deteriorate next year, while 26% feel it will improve. Some 38% said they are spending less this season, while 15% said they are spending more. Those mixed messages have economists puzzling over just what's making the consumer tick this holiday season. But they learn more about the science of shopping all the time, and a close look reveals how we are mustering the fortitude to spend our way through the economy's cross-currents:

JOBS. Some folks are strapped after years of a jobless recovery. But this year nearly 2 million jobs have been created in the U.S., and wages and salaries are on the rise. The momentum was reinforced last Friday, when the Labor Department reported 215,000 new jobs in November. "There is a huge disconnect between the headlines and reality," says economist Ed Yardeni at Oak Associates, an investment firm. "It's a prosperous world." But in the consumer's mind, nothing trumps job security. Reuben Kuruvila, 26, of Atlanta, plans to spring a fur coat on his wife. "I really can't tell what the economy will do," he says, but adds that he expects a decent raise after completing management training at the hotel company where he works.

STOCKS. Have you checked your 401(k)? The balance may be below where it was five years ago. But it's moving up. The Dow Jones industrial average has gained 6.5% over the past six weeks, is in positive territory for the year and is within striking distance of its all-time high of 11,723. Fueling the rise: companies are flush with profits, buying back shares and raising dividends. "I don't factor it into decisions like shopping," says Scott Fuselier, 32, a sales manager in Atlanta, of his rising 401(k) balance. "It's so long-term." Yet that is measurable wealth for the half of the population that owns stocks. Confident in his net worth and prospects, Fuselier is renovating two rooms in his home for Christmas.

ENERGY. The high cost of oil, electricity and natural gas is the greatest economic worry for Americans, according to the TIME poll; 69% call it a major concern. But it's not as much of a drag on spending as you may think. Yes, consumers will spend $24 billion more on energy this quarter than in the same period last year, a 21% jump. That hardship is prompting some to rethink holiday splurges. But prices have come down from their post-Katrina highs, far enough to spur a spike in consumer confidence. For a while, says college student May Rashid, 22, in Fort Worth, Texas, "gas prices were taking all my money," and she planned to cut holiday spending. Now, with gas prices falling, she figures the crunch will be manageable and is enticed to keep shopping because "I keep finding things that I know people would really want."

INFLATION AND INTEREST RATES. Gold hit $500 per oz. last week, the first time it's reached that mark since 1987, a sign that inflation may be heating up. To avoid that, the Federal Reserve has been boosting rates for two years, making all borrowed money more expensive. That troubles Jodi Legge, 41, of Hudson, Wis., who expects that her home-equity debt is going to cost more every month. So she and her husband Ed are sticking to the holiday budget they agreed on. Still, "we haven't cut back," Jodi says, although she's redirecting money to more practical places.

HOUSING. Everyone is worried about a bubble that could burst as interest rates rise, forcing millions with floating-rate mortgages to come up with more cash each month or sell. Yet when it comes to shopping right now, such troubles are a distant concern. Lucy Garrett, 55, an analyst for the Denver Public Schools Retirement System, has been in her house for 28 years and upon selling her deceased aunt's home this year realized how much equity she has built. So if she inadvertently busts her careful Christmas Club budget, she says, "I know it would be O.K. because I have money in other places."

Next Christmas, though, may be a different story for many as the impact of higher costs for food, fuel, medicine and mortgages comes home to roost. And by then, says Mark Zandi, an economist at Economy.com home prices may be stagnant or edging lower. That's when the "home ATM will shut down," and with it, possibly, the spending urge. Energy costs are draining our budgets ... $56.46 - Price per barrel of oil West Texas intermediate crude

...mortgages and other rates are on the rise ... 6.33% - Fixed-rate mortgages Average 30-year

... the housing market is beginning to cool ... 7.09 million - Existing-home sales (in millions) Seasonally adjusted

... and credit card debt is at an all-time high... $801.5 billion - Consumer credit debt (in billions) Revolving, seasonally adjusted

Sources: Department of Energy; Freddiemac.com Realtor.org Federal Reserve Board

TIME POLL

How would you rate economic conditions in this country today? 4% Excellent 29% Good 42% Only fair 24% Poor

On your holiday shopping this year, are you spending ... ... more money than last year? 15% ... less money than last year? 38% ... same amount as last year? 46%

This holiday season, are you spending more money on ... ... practical items? 73% ... luxury items? 16% Don't know: 11%

With reporting by Jeremy Caplan/ New York, Sarah Sturmon Dale/ Minneapolis, Greg Fulton/ Atlanta, Rita Healy/ Denver, Adam Pitluk/Fort Worth