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U.S. Economy: Retail Sales Drop in October by Most on Record

By Shobhana Chandra and Bob Willis

 

Nov. 14 (Bloomberg) -- Retail sales and prices of goods imported to the U.S. dropped by the most on record, signaling the economy may be in its worst slump in decades.

 

Purchases fell 2.8 percent in October, the fourth straight decline, the Commerce Department said today in Washington. Labor Department figures showed import prices dropped 4.7 percent, pointing to a rising danger of deflation, and a private report said consumer confidence this month remained near the lowest level since 1980.

 

``The weakness in growth is intensifying and inflation pressures have evaporated,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut, who accurately projected the decline in sales. ``Deflation is a word that will be increasingly used over the coming months.''

 

Spending may continue to falter as mounting job losses, plunging stocks and falling home values leave household finances in tatters. Retailers from Best Buy Co. to J.C. Penney Co. are cutting profit forecasts ahead of the year-end holiday shopping season, when many stores do most of their business.

 

Federal Reserve Chairman Ben S. Bernanke said at a conference today in Frankfurt that continuing strains in financial markets and recent economic data ``confirm that challenges remain.''

 

The Fed chief said central bankers worldwide ``stand ready to take additional steps'' as warranted. Economists surveyed by Bloomberg News predict the Fed will lower its benchmark interest rate to a record 0.5 percent by March from the current 1 percent. Policy makers next gather in Washington Dec. 16.

 

Stocks, Treasuries

 

Stocks fell and Treasuries rose. The Standard & Poor's 500 Stock Index dropped 1.8 percent to 894.09 at 10:11 a.m. in New York. Yields on benchmark 10-year notes fell to 3.75 percent from 3.85 percent late yesterday.

 

The Reuters/University of Michigan preliminary index of consumer sentiment was 57.9 in November compared with 57.6 last month. The measure averaged 85.6 in 2007.

 

Retail sales were expected to fall 2.1 percent, according to the median forecast of 73 economists in a Bloomberg News survey. Purchases in September were revised down to show a 1.3 percent decrease compared with an originally reported 1.2 percent drop.

 

``The September-October credit jolt to the economy is showing up in all of the numbers now,'' Ellen Zentner, a senior U.S. macroeconomist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said in a Bloomberg Television interview. ``We're expecting the worst recession, possibly, post-World War II.''

Worse Than Estimates

 

Retailers have now logged the longest string of monthly declines since the Commerce Department's comparable data series began in 1992. Excluding automobiles, purchases decreased 2.2 percent, almost twice as much as the 1.2 percent decline anticipated and also the worst performance on record.

 

Declines were broad based as furniture, electronics, clothing and department stores all showed loses.

 

Demand at automobile dealerships and parts stores plunged 5.5 percent after falling 4.8 percent in September.

 

Car sales are among the most affected as banks make it harder to borrow. Treasury Secretary Henry Paulson this week said the government will shift the focus of the second half of the $700 billion rescue plan from buying mortgage assets to unclogging consumer credit. President-elect Barack Obama and Democrats in Congress are under pressure to push through another stimulus plan even before the new administration takes over.

 

Filling-station sales decreased 13 percent, also the most ever, in part reflecting a $1-per-gallon drop in the average cost of gasoline. Excluding gas, retail sales fell 1.5 percent.

 

Gain at Restaurants

 

Sales at furniture, electronics, clothing, sporting goods and department stores were also among the losers. Restaurants, grocery stores and a miscellaneous category were the only areas that showed a gain.

 

``Since mid-September, rapid, seismic changes in consumer behavior have created the most difficult climate we've ever seen,'' Brad Anderson, chief executive officer of Best Buy, said in a Nov. 12 statement.

 

The Richfield, Minnesota-based electronics chain said sales in the four months through February 2009 will decline more than it previously estimated. Rival Circuit City Stores Inc. filed for bankruptcy protection this week.

 

Macy's Inc., Target Corp. and Gap Inc. were among the chains that reported same-store sales dropped in October, while shoppers searching for discounts on groceries gave sales a lift at Wal- Mart Stores Inc., the world's largest retailer. Nordstrom yesterday cut its profit forecast for the third time this year.

 

Worst Season

 

J.C. Penney, the third-largest U.S. department-store company, today forecast earnings that trailed analysts' estimates and posted its fifth straight quarterly profit decline as shoppers cut spending on home goods and jewelry.

 

Shoppers are pulling back as the labor market slumps. The unemployment rate jumped to 6.5 percent in October, the highest level since 1994. Employers cut more than a half million workers from payrolls in the past two months.

 

The longest expansion in consumer spending on record ended last quarter, causing the economy to shrink at a 0.3 percent annual pace.

 

The economic slump will intensify this quarter and persist into the first three months of 2009, making it the longest downturn since 1974-75, economists forecast in a Bloomberg survey conducted from Nov. 3 to Nov. 11.

 

Excluding autos, gasoline and building materials, the retail group the government uses to calculate gross domestic product figures for consumer spending, sales decreased 0.5. The government uses data from other sources to calculate the contribution from the three categories excluded.

 

To contact the reporter on this story: Shobhana Chandra in Washington [email protected]

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