Consumers close their wallets
Retail sales plunge a record 2.8 percent in October, suggesting a dismal outlook for holiday spending.
The consumer is in no mood to spend.Skip to next paragraph
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With only a few weeks to go before the holiday season officially kicks off, retailers are saying this is the worst consumer environment since World War II. Big box retailers are fighting for survival, department stores are preparing massive promotions, and some stores are asking manufacturers to take back their products even before Thanksgiving.
An unenthusiastic consumer has wide ramifications for the US economy because 70 percent of the nation's production of goods and services is oriented toward consumption. Economists are lowering their estimates for economic growth for this year, expecting a sharp contraction of at least 3 percent in the fourth quarter. By early December, some observers think the Federal Reserve will be forced to lower interest rates to below 1 percent for the first time since the Eisenhower administration.
Who can blame consumers for putting on their slippers and watching football games? The volatile stock market seems to have a black cloud over it. Home prices have yet to bottom out. Pink slips are proliferating. And, the credit card companies want payment even while the ink dries on your statement.
The latest indication of tightly shut consumer wallets came Friday when the Commerce Department reported retail sales in October fell 2.8 percent, the biggest one-month drop since at least 1992 when the department changed the way it reports the numbers. This is the fourth consecutive month of lower retail sales, also a record. The decline was led by a 5.5 percent drop in auto sales as potential car buyers either could not get loans or just stayed away from showrooms.
"This is a bad precursor to the holiday season," says Bob Brusca of Fact and Opinion Economics, an economic analysis firm in New York. "You have to be worried about demand collapsing in October ahead of the holiday season when the bulk of retail activity occurs."
Bad news changing spending behavior
Even eliminating the problems of selling cars and the effect of lower gasoline prices, retail sales still fell 0.5 percent in October. "What we are worried about is a change in spending patterns," says Scott Brown, chief economist for Raymond James & Associates in St. Petersburg, Fla. "A lot of people are not that much affected by the job losses or changes in the economy but they are scared and are adjusting their spending."
Some adjustments are starting to show up in the way people are shopping, says Dennis Jacobe, chief economist at the Gallup, Inc. in Washington. In consumer surveys, Gallup is finding lower gasoline prices and the election of Sen. Barack Obama have made lower-and middle-income wage earners more optimistic. "But, that is offset to some degree by the jobs situation and the credit crunch for the average American," says Mr. Jacobe.