Quote Originally Posted by kexodusc
Well Wooch, I know the investment world is living in fear of the prospect of consumers holding off buying today out of anticipation for yet even bigger price cuts tomorrow.

Consumers think they're smarter these days (and many are). They know in a tough economy that demand drops and exerts downward price pressure (ignoring supply adjustments of course).

What we're wondering is if buyers' wide-spread belief of a better price later can actually force retail's hand to lower prices even more now. This is a nasty recipe for deflation, which is devastating and brutally hard to get out of.

Hope the data holds up and people are spending at a reasonable pace at least.

We might not know until much later, and here's a case where perceptions might adversely influence reality...
I think that there's probably enough pent up retail demand to avert an all-out catastrophe, at least for the holiday season. People have to lay out a certain amount of retail spending just to maintain a household, and a lot of those purchases got deferred in October and November. If some of those deferred purchases are made in December, then that potentially makes up for reductions in gift spending and discretionary purchases.

It also helps that the lower gas prices might further loosen the purse strings for retail purchases. Between my wife and I, we're back down to a combined $40 a week for gas, whereas we were over $100 a week just two months ago.

I think the factor that might avert a deflationary cycle in the short term is simply lower inventories. Retailers had already planned for reduced inventory, and once the financial crisis hit, they canceled their remaining holiday orders. Because of how quickly the market conditions deteriorated in October and November, retailers shifted a lot of the holiday discounting early. The pricing they have in effect right now is what would normally occur in mid-December. If retail inventories get depleted more quickly, then the stores won't feel as much pressure to launch a more aggressive round of discounting.

The real catastrophe in retailing though might still happen in the early part of next year. With the new unemployment numbers and rumors buzzing about major layoff announcements early next year, I suspect that consumers will really start cutting back in January. Depending on inventory levels, that would be where any deflationary cycle begins.