Most of the time we associate the holiday season with toys, gadgets and apparel. This year, many newspapers and wire services are reporting that "specialty stores" are outperforming department stores because they have a more unique selection of goods. Consumers appear to be interested in cozy inexpensive items. The go-go years of the late 1990s are gone and consumers want to spend less for the holidays, like they do in all recessions. A definite pattern has emerged over the past 30 years in holiday spending and in which types of goods or services consumers indulge.

We compared fourth-quarter growth rates for the various components of personal consumption expenditures over the past 32 years in a span covering several business cycles. Consumers tend to gravitate toward certain types of goods and services in the year's final three months. Due to the high degree of toy and apparel shopping, one would expect that nondurable goods expenditures would rule during the holidays. But, during non-recessions, durable goods grew more rapidly (+6.0%) than nondurable goods (3.4%) or services (4.1%) in the fourth quarter. Among durable goods, "other durables" are the strongest category. This includes jewelry & watches, books & maps, durable toys, and boats and pleasure aircraft. Without more detailed information, my bet is on jewelry, watches, books and durable toys (bikes, for example) as the major purchase items. (Though one never knows when a boat or float plane will show up under the Christmas tree, particularly if one lives in Alaska.)

Among services, the fastest growing item in the October-December quarter tends to be recreation. Consumers take advantage of the holidays to go on vacation. Not surprisingly, the strongest item among nondurable goods is clothing during non-recessions, followed close behind by "other nondurables." These would include toys and sports supplies.

A recessionary environment does indeed change consumer behavior during the holidays. Durable goods are no longer the major source of sales! Surprisingly, the component to suffer least in this environment is furniture, where the average decline was only 2.2 percent over the past seven recessions. But no doubt about it, durable goods purchases are typically losers during economic contractions and this doesn't change over the holidays.

Nondurable goods have posted a modest decline during the past seven recessions, but here too, the components show some diversity. The most significant loser is clothing; not surprisingly, food purchases suffer the least and still manage to post gains during recessions.

Spending on consumer services suffers the least during economic downturns because much of these consumer expenditures are considered necessary. Most surprising, though, is the fact that recreation services still have posted fairly strong gains even during recessions.

Are this year's sales any different from the historical average?
We don't have a lot of information on all these categories yet, but we will see some quite dramatic differences in at least a few of the categories when fourth quarter personal consumption expenditures are first reported at the end of January. The most notable difference from the historical average will be an unprecedented gain in motor vehicle sales. Remember that automakers introduced zero percent financing in October -- and it's scheduled to last through the end of the year.

The other major difference relative to historical performance during recession is that the recreation and transportation categories are likely to show sharp deterioration. Demand for travel fell off a cliff after the September 11 tragedy amid already weakened demand in the airline industry during the first half of 2001. Hotel vacancy rates are high. A recent WSJ article reported that urban centers, particularly on the east and west coasts, posted larger declines in demand from a year earlier in November than smaller cities and those in the Midwest.

Bottom Line
Investors often use the calendar year to reassess and re-balance their portfolios. Equity investors would do well to consider how consumers typically behave during recessions so that they could consider buying or selling stocks in line with these cyclical patterns. For instance, the demand for durable goods is indeed sluggish during downturns. In anticipation of approaching recovery, it is likely that prices for durable goods companies may begin to appreciate in value. Equity prices for nondurable goods and services are often considered non-cyclical or defensive stock purchases for a portfolio. These may have already behaved better than usual. With respect to travel and leisure, this industry may suffer for a longer time period than other cyclical stocks due to extremely poor profit conditions. Automakers may appear to outperform typical recessionary conditions, but offering sweet incentives to lure in customers may be at the expense of future sales, and certainly at the expense of higher profits.

There is a lot to consider this year-end from an economic perspective. How will holiday sales fare? What categories will be the clear winners? Most important, how much longer will the recession last? If the recession ends soon, a good number of cyclicals will recover in a hurry, but if the recession lasts for many more months, investors may still do better with defensive stocks. And if you speak with your accountant, she'll remind you to also consider selling losing positions (or not) to take advantage of the tax write-off.

Evelina M. Tainer, Chief Economist, Econoday