WASHINGTON — This holiday season, it's hard to tell who is more terrified: retailers or their customers.

The economic slump is rattling U.S. shoppers as their wallets shrink and credit dries up. Retailers, who just reported their worst October in decades, fear disaster. The battle for customers — and survival — is on, and stores have little margin for error. With Wal-Mart dominating the race to rock-bottom prices, those who can't compete must get creative.

"Believe," says Macy's.

The storied department store chain is betting that what shoppers want most during these turbulent times is hope. And it is relying on Virginia, the 8-year-old girl who wrote to the New York Sun in 1897 to find out if Santa Claus really existed, to embody it.

The Sun's response to her letter — "he exists as certainly as love and generosity and devotion exist" — was reprinted in about 300 newspaper ads Sunday, and Macy's celebrity designers Martha Stewart and Jessica Simpson recite the paean to beauty, joy and faith in TV spots. Stores will be outfitted with desks and mailboxes where children can scrawl their letters to Santa. "Believe" has become the company's holiday campaign motto.

Surely, the thinking goes, some shoppers must need relief from wallowing in their economic misery. Women's clothing chain Talbots is hoping they'll want to escape to private parties at its stores.

At these "hostess events," a loyal customer throws the party, and the store shuts down to the public. The company provides hors d'oeuvres, drinks and, in some cases, even a stylist to help women update their looks. All the hostess has to do is bring her friends and their charge cards. Apparently, they are.

"I anticipated them being good," Talbots marketing chief Lori Wagner said of the parties. "I never anticipated them being a religion."

About 70 parties have been held so far, with 60 to 200 shoppers at each event, she said. Talbots is expected to roll them out to all its stores by the first week of December. The parties are supposed to build relationships between shoppers and store employees, which the retailer hopes will translate into higher sales, she said. Talbot's holiday line was designed around the concept of the perfect hostess, inspired by the chain's socialite founder, Nancy Talbot. It's even emphasizing "hostess gifts" such as small leather goods and sweaters for the first time this year, Wagner said.

But it remains to be seen whether warm and fuzzy feelings translate into bottom-line growth during a year of financial crisis. Darrell Rigby, a partner at consulting firm Bain & Co., said many shoppers are on tight budgets this year and may not be swayed by their psyches.

"Economic downturns have a way of turning consumer purchasing hierarchies upside down," he said. "Self-actualization and esteem-building don't seem nearly as important as taking care of basic needs."

For retailers, the dangers in the weeks ahead are enormous. Retail bankruptcies litter the landscape. Circuit City filed for protection under Chapter 11 bankruptcy a few days ago. Linens 'n Things, Steve and Barry's, Boscov's and Mervyns all fell before it.

Retail consultant Howard Davidowitz said many retailers are on life support and could fold if the holiday season turns ugly. Even those that are healthy are cutting labor costs and expenses.

"Get yourself into survival mode," Davidowitz said. "That's what smart people are doing."

It's a lesson that Target has learned as sales have slumped. Target became a cultural icon with its stylish, eye-catching ads and cheap-chic clothes, which bring in as much as 22 percent of its revenue. But as shoppers cut back on such indulgences, Target found its message had veered off-key.

So this Christmas, it is spotlighting gifts that cost less than $25, such as vintage board games and makeup brushes.