Consumer Spending Is Down but Hopes Are Up, Studies Say
The Sept. 11 terrorist attacks knocked the wind out of American consumers, the Commerce Department reported Friday, with retail sales posting their biggest decline in nearly 10 years of government record-keeping.
But a separate survey of household sentiment provided an unexpected glimmer of hope: Consumer confidence actually rose slightly in early October from the levels registered immediately after the attacks.
Economists warned against reading too much into the confidence numbers, which remained well below pre-September levels and reflected rising optimism about future activity, not current conditions.
“The sales figures are by far the most decisive,” said Stephen S. Roach, chief economist for Morgan Stanley Dean Witter & Co. “They dispel any notion whatsoever that the economy has not fallen into recession. The consumer is pulling back on virtually all fronts.”
Overall retail sales fell 2.4% in September, the biggest monthly decline since the Commerce Department began keeping comparable statistics in February 1992. Sales had increased 0.4% in August.
Last month’s decline, considerably larger than expected, provided more evidence that the U.S. economy has begun contracting for the first time since the Persian Gulf War. Consumer spending, which accounts for two-thirds of the nation’s economic activity, had remained surprisingly strong before the attacks on the World Trade Center and the Pentagon.
“The consumer has pulled the economy over the edge into a recession,” said Merrill Lynch & Co. senior economist Gerald D. Cohen, who, like most analysts, had anticipated a milder decline.
Dow Drops, but the Nasdaq Gains
The gloomy spending figures contributed to a Friday stock-market slump. The Dow Jones index dropped 65.43 to close at 9334.02, and the S&P; 500 fell 5.80 to finish at 1091.63. But the Nasdaq extended its recent gains, rising 1.84 to 1703.31.
In Congress, the Republican-controlled House Ways and Means Committee approved a $99.5-billion package of tax cuts and spending increases designed to hasten an economic recovery.
The 23-14 party-line vote marked Congress’ furthest retreat yet from the bipartisan spirit that gripped Capitol Hill immediately after Sept. 11. The Ways and Means package substantially exceeded President Bush’s request for $60 billion to $75 billion in new stimulus measures.
Included were:
* Tax rebates of up to $600 per family for taxpayers who did not qualify for the summer’s round of refunds because they paid Social Security tax but not enough income tax.
* Earlier effective dates for some of the income tax rate reductions of the tax cut that Bush signed into law in June.
* Faster write-offs by business of the cost of new plant and equipment.
* Reductions in taxes on investment profits.
* Enhanced benefits for the unemployed.
The bill is expected to be changed considerably by the Democratic-controlled Senate before becoming law. White House spokesman Ari Fleischer said Bush “wants to work closely with the Democrats on this.”
Sales Report Isn’t the Full Picture
If anything, September’s retail sales report understated the effect of the terrorist attacks on consumer spending, because it reflected retail activity before Sept. 11 as well as after. In addition, it did not include spending on services, such as airline travel and hotel stays, both of which have fallen sharply since the attacks.
Consumer spending declined last month in all but a few categories. Excluding autos, total sales fell 1.6%, the Commerce Department said. Vehicle sales were down 4.6%, clothing stores took a 5.9% hit, restaurants and bars lost 5.1%, and sales by online and catalog merchants plunged 8.0%.
Stores selling basic consumer goods fared best. Grocery store receipts were up 0.5% and drugstore sales rose 0.8%. Gas station sales jumped 3.0%, but higher gasoline prices accounted for most of that.
“People are cocooning it a bit,” said Diane Swonk, chief economist with Bank One Corp. in Chicago. “They’re spending more on staples, less on the floss. High-end retailers like Sharper Image are getting pummeled, while Wal-Mart has record sales.”
Consumer spending had been expected to slip in the aftermath of last month’s attacks, partly because of the “CNN effect”: Americans who otherwise might have gone shopping stayed home to monitor the latest developments in the tragedy.
But the magnitude of the decline caught analysts by surprise. Surveys of economists taken before the report’s release predicted sales would fall by less than 1%.
Some prognosticators were equally perplexed by the unexpected rise in consumer confidence. The University of Michigan’s sentiment index rose to 83.4 in early October, up from 81.8 for September but well below August’s 91.5 reading. The October figure reflected survey responses from Oct. 1 through Thursday.
The increase was attributable to swelling optimism about future economic conditions. The University of Michigan’s overall confidence index is based on two readings, one measuring perceptions of current conditions and the other based on expectations. The index of perceptions fell to 92.1 in early October from 94.6 in September, while the gauge of future conditions jumped to 77.9 from 73.5.
Consumer confidence had been declining for several months, largely in response to corporate layoffs and rising unemployment. The nation’s jobless rate has ratcheted up from 3.8% a year ago to 4.9% in August and September.
Deeper Slide Predicted Until Stimuli Kick In
Several economists said they expect the confidence figures to resume their downward trend as job market conditions worsen in the months ahead. That, in turn, will cause consumer spending to soften further, deepening the economic downturn until the stimulative effect of repeated interest rate cuts, tax reductions and emergency spending finally is felt.
“We’re now in a vicious cycle of declining retail sales, which means inventory levels aren’t excessively low, which means manufacturing doesn’t have to pick up, which means hiring won’t turn around,” said Brian S. Wesbury, chief economist with Griffin, Kubik, Stephens & Thompson in Chicago. “I think it’s probably the second quarter of next year before it starts feeling any better.”
In a separate report issued Friday, the Labor Department said wholesale inflation rose 0.4% in September, the same as in August. Last month’s increase was somewhat bigger than expected but reflected price trends before the Sept. 11 attacks. Energy prices, which jumped 0.9% at the wholesale level, were a major contributor to last month’s increase.
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Associated Press contributed to this report.
