After two wild and delirious Christmas shopping seasons, the Grinch is creeping up on this one. There still may be a Cindy Lou Who who may change his heart, but retailers have more fear than cheer in their hearts this year.

Christmas spending has become less dramatic relative to the rest of the year than in past decades. Still, about a fourth of all retail sales and forty percent of all profits happen in the period beginning with Thanksgiving and ending the week after Christmas (the last shot at all those returning gifts has always been a time to move unwanted inventory).

Because of its importance, retailers look at several milestones and economic indicators to get an impression of Christmas. Their first clue of consumer activity is the back to school sales. If the high priced goods are moving, then consumers are ready to buy, buy, buy. Back to school sales were OK, but they followed a horrible summer. That is when retailers made their first Christmas orders with hope but not confidence. (Actually, jewelers and toy stores make orders much earlier, but they have other benchmarks that are special to them).

Then, the increasingly adult Halloween becomes a measure. If adults are ready to party, Halloween will be huge and so will Christmas. This year the parties were pretty small. Check one for the Grinch.

Catalog sales also give an early indication of Christmas activity. Much of that activity is going on-line and the response expected by consumers is shorter. Before the internet, October catalog sales already would be the first Christmas rush. This year, the Grinch's heart almost vanished. Perhaps internet sales will make up for the weak paper and phone orders. Certainly, the dot.coms whose money runs out soon need a surge to keep them running.

Of course, the next read is Thanksgiving weekend. This is not the biggest weekend for sales. The weekend before Christmas almost always eclipses every other. But Thanksgiving weekend tells how consumers are responding to promotions, where the hot items are, and how big Christmas might be. If you see lots of packages coming out of the malls, then good cheer will return. If not, look for special promotions throughout December, which will end the quest for solid profits by retailers.

So far the shopping polls show the Grinch slightly in the lead.

The economic indicators are no better. Consumer confidence remains high, but the rate of decline in recent months has been precipitous. I put more stock on the direction and magnitude of change then the level of the index. Only recessions show the sharp declines in sentiment that we currently are experiencing, but we remain at high levels.

Employment growth has slowed from nearly 200,000 jobs per month in the first six months to less than 100,000 monthly jobs since then. Furthermore, initial unemployment claims reached their highest levels of the year two weeks ago. The auto industry clearly has excess inventories and is shuttering assembly lines for weeks at a time. Clearly, job growth is slowing further.

Consumer debt has begun to moderate, but from high levels. Consumer fear of debt probably is a negative for retailers, but the improved management of debt almost certainly will be favorable in the long run.

Banks are suffering increased loan losses at 50-200% of their five year trend. More than a third already have begun to tighten credit conditions. Many more will do so in coming months. Bank problems can lead to recession almost quicker than any other sector. Their rise in loan losses is not good.

However, capital supporting deposits is more than twice the rate that existed in the last recession. Furthermore, bank earnings have continued to rise despite the large provisions for loan losses. In short, unless some unexpected surprises surface, banks should easily manage this downdraft in loan quality.

Unfortunately, the picture is even bleaker in financial markets. All the quality rated bonds are selling at substantially larger discounts to the comparable Treasury debt. Furthermore, long term interest rates for government securities are lower than short term rates. The high yield securities show the largest spread to Treasuries since the collapse of Drexel Burnham in the latter 1980s. If I showed this picture to a business cycle class, they would immediately recognize what happens prior to a recession.

Fortunately, there is one alternative explanation for the high spreads (except in the high yield market). Debt reduction has reduced the supply of Treasury debt, actually causing scarcity there. Indeed, investors in high yield government bonds probably will get decent returns for their efforts this year.

Finally, the stock market is a mess. NASDAQ has almost halved from its highs. Furthermore, trading is becoming increasingly disorderly meaning that prices between trades are changing by much more than normal. None of this is good for the current dynamics of the equity markets. Election uncertainties have added to the problems but those employment, confidence, and credit conditions also have stock market implications.

However, the markets rose spectacularly for almost three years before the "wealth effect" kicked in. They probably need to drop for more than a year before the "wealth effect" is reversed.

I currently am assuming about 4 percent growth in inflation adjusted spending for Christmas or about 5.5 percent after adding still moderate inflation. That pales next to the past two years, but that used to be merry enough for most retailers.