BUSINESS

High Holiday Spending But Economy Still Lags

12/28/2010 03:14 pm ET | Updated May 25, 2011

Holiday spending has been robust this season, in an encouraging sign for economic forecasts, but concerns linger as to whether or not such a pace is sustainable.

Consumer spending in the 2010 holiday season jumped 5.5 percent from 2009, the biggest margin of growth since 2005, according to reports by MasterCard Advisors' Spending Pulse. Apparel performed especially strongly, with a spike of 11.2 percent from last year. Considering that 70 percent of all U.S. economic activity is attributed to consumer spending, the news brings welcome holiday cheer.

Other indicators of consumer optimism have also proved positive. The Thomson Reuters/University of Michigan Consumer Sentiment Index found that December readings grew to 74.5 from 71.6 in late November.

Some believe, however, that the boost in holiday spending will be mitigated by a January lull, where consumers deal with the 'hangover' of their heavy shopping.

"This pace of spending is unsustainable," said Ryan Sweet, a senior economist at Moody's Analytics. "We're going to see some payback early in 2011."

And while the Consumer Sentiment Index seems to show growth in consumer confidence, the Conference Board's Consumer Confidence index actually dropped slightly in December to to 52.5 from 54.3 in November. A reading of 90 is considered on par for a healthy economy.

Despite holiday shopping numbers, it may not time to start celebrating just yet. Even if the economy seems poised for some gains, economists caution that progress will be a slow and steady process.

"There are terrible housing market issues, high gas prices--whatever you see on the positive side, it's not like you're going to break out the champagne," said Chris Christopher, IHS Global Insight's U.S. Economist. "It's more the kind of thing where you proceed cautiously."

But experts predict that the two percent cut in payroll taxes that begin this January will at least do its part to prevent too steep a drop in spending.

"We're putting lots of spending power in people's pockets," said Joshua Shapiro, the Chief U.S. Economist at MFR, the economic consulting and advisory firm. "If you do the math it's worth a hundred billion dollars for consumer spending. If anything we'll maintain the momentum or even build on it."

Even if spending manages to hold steady at these levels, it will be the fate of the labor market that ultimately determines the future of spending. Unemployment in the country still holds steady at 9.8 percent.

"We're slowly moving in the right direction," said Sweet. "We're going to need to walk before we can run."

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