• by Sarah Mahoney  @mahoney_sarah, January 27, 2009

If the government acts quickly to goose the economy, including ushering in first-ever national sales tax holidays, the National Retail Federation predicts an upturn in consumer spending in the final quarter of 2009. Still, based on stalled consumer spending, it is predicting an overall decline for the year, and anticipates that retail sales will fall 0.5% in 2009--the first time it has predicted a decline since it began forecasting in 1995.

In a conference call, Rosalind Wells, the trade group's chief economist, says it expects retail sales to fall 2.5% in the first half, and 1.1% in the third quarter. By the fourth quarter, it expects sales to gain 3.6%, based on easier comparisons from last year's weak holiday period, as well as an improving economy. Without prodding from the government, however, those numbers could well be lower.

"Consumers make up the largest part of the economy, and they're not spending, because of the poor employment outlook, declining housing prices, and falling stock prices. Business isn't spending, and won't, until it sees an improvement in consumer spending. Foreign trade is also weak, with all our trading partners suffering from the same problems," she says, "which leaves us with the fourth sector of the economy--government--as the only area that can get things moving. This downward cycle will not be easy to break," she says, adding that the longer officials wait, "the longer the turnaround will take."

The NRF hopes that new stimulus measures will include first-ever national sales-tax holidays, rather than sending stimulus checks to consumers, as the government did last year. "With last year's rebate checks, we saw that while consumer spending was somewhat better than it might have been, everyone felt the results were disappointing," says Rachelle Bernstein, the NRF's VP and tax counsel. Sales-tax holidays would ensure that consumers went out and shopped, circulating more cash through the economy. And even if they didn't, she adds, "then the government isn't out any money, anyway."

Acknowledging that the proposed holidays--three 10-day periods, which would cost about $700 million per day, or between $20 billion and $21 billion--certainly are not enough to solve all the consumer-spending problems, the NRF says they may provide the short-term stimulation that would help. "This would help get consumers, psychologically, to get back into the stores. We've seen it work over and over."

Meanwhile, the duo predicted that the crazed price-cutting of the holiday period is probably history. "Because of what's happened, retailers are being more conservative with inventory, and so the need to have that panicked price-cutting is lessened," says Wells. And in addition to better inventory management, adds an NRF spokesperson, stores are "trying to be efficient as possible, to do more with less in their advertising, and sometimes changing their merchandising mix."