NEW YORK, Nov 20, 2008 (AFP) - There could be a nasty surprise under the tree for the US economy this Christmas. Fairy lights are already twinkling across New York, shop windows sport fake snow, and a 72-foot (22-meter) Norway spruce, destined to sport a 25,000-crystal Swarovski star, has been hoisted outside the Rockefeller Center.

But for stores here and across the country the holiday shopping season -- traditionally a big contributor to the overall economy -- promises grim tidings.

With government figures showing national retail sales down 4.1 percent in October from the previous year, shops are slashing prices in a desperate search for customers.

Consumer stalwarts J.C. Penny's and Neiman Marcus posted big losses in the third quarter, while venerable department store Macy's lost 44 million dollars, and electronics giant Circuit City declared bankruptcy.

Moody's Economy.com sees "the worst retail season in 15 years."

Among the few retailers in good shape, market watchers say, are inexpensive stores like Wal-Mart, online sellers, and second-hand shops. One thrift chain, Goodwill, reports a six to 11 percent sales increase in October.

That leaves regular stores offering 50, 60 even 80 percent discounts in a scramble for an ever dwindling band of shoppers.

One shoe shop in Manhattan's trendy Village neighborhood has a "recession sale," while women's clothes chain Ann Taylor is putting on a brave face, with signs insisting: "There will be parties."

But Moody's Economy.com warns that consumers will not be easily lured.

"Unemployment is rising, household wealth is falling, and credit conditions are tight," Moody's says. "Squeezed from all sides, consumers are being frugal."

That's not just bad news for retailers, but for the US economy at large. Consumer spending accounts for about two thirds of US economic activity, with the Christmas gift giving season a key contributor.

The United States is not yet technically in recession -- that milestone is likely to be announced early next year -- but at ground level the fear is already real.

"We're suffering," said Marissa Orellana, assistant manager at Crane and Co, an upmarket stationary shop in Manhattan.

The store, which sells bespoke stationary and elegant Christmas cards, is bracing for a 30-40 percent sales drop.

"People are not spending: they keep their money in the bank right now in case of emergency," Orellana said.

Her own family has cancelled its usual week away during Christmas. "We'd rather save, in case, God forbid, one of us loses a job," she said.

Nearby, at a 5th Avenue antiques store, jobs are already under the axe: the shop closes at the end of the year and is trying to offload inventory.

"People are not buying," said employee Tito Moe, wondering where he'll get another job. "They're scared. They don't know what's going to happen."

Such sentiments are backed up by a Deloitte survey published late October showing that "a record number of consumers" feel pessimistic. Almost two thirds plan to cut spending over the holidays.

That applies even to the relatively well-heeled, like Linda Jacobs, 47, visiting New York's 5th Avenue Apple Store this week.

Wrapped in fur against early winter chill and toting a Gucci bag, Jacobs said she would buy her son a laptop computer for Christmas, but forego any further splurges.

"I was in the mall yesterday, but we were just touching, not buying," she said.

"Still, women need to shop," she added with a smile. "Retail therapy makes us feel better -- especially at a discount."by Sebastian Smith