WASHINGTON – Superstorm Sandy combined with cautious consumers to lower retail sales in October and raise concerns about weaker economic growth and a tepid holiday shopping season.
Consumers may also be holding back because of anxiety over big tax increases and spending cuts – known as the “fiscal cliff” – that will take effect in January unless Congress and the White House reach a budget deal by then.
Retail sales dropped by 0.3 percent last month after three months of gains, the Commerce Department said Wednesday. Sales at auto dealers fell by 1.5 percent, the most in more than a year.
The storm depressed car sales and slowed business in the Northeast at the end of the month, economists said. The government said Sandy forced some stores and restaurants to close and lose business, while others reported higher sales ahead of the storm as people bought supplies.
Online and catalog purchases fell by 1.8 percent, the most in a year. Widespread power outages prevented some online shopping.
But sales slowed in eight of the 13 broad categories tracked by the government. Electronics, building supplies and clothing stores all posted lower sales. The broad declines suggest that October’s weakness went beyond the storm.
“Looking past [Sandy's] impact, U.S. consumers appeared to dial it back a notch,” said Robert Kavcic, an economist at BMO Capital Markets. “There was relatively broad-based weakness in this report.”
The retail sales report is the government's first look at consumer spending, which drives 70 percent of economic activity. Economists say the November and December sales figures will provide a better picture of the economy's health.
If sales rebound, that would suggest that the October decline was a temporary lull exacerbated by the storm. But continuing weakness would show that consumers are scaling back on spending, perhaps because of concerns that their taxes will increase next year.
Retailers traditionally see a lull in October because consumers take a break before buying holiday gifts. But Americans’ fixation on the presidential election and Superstorm Sandy worsened the trend, said Ken Perkins, president of Retail Metrics, a research firm.
The average shopper is also starting to worry about the fiscal cliff, Perkins said. He expects that stores will step up discounting in the coming weeks to make up for lost business.
Most economists expect sales to rebound in the coming months. That’s because Americans will begin to repair the damage from Sandy and replace cars that were destroyed in the storm.
One hopeful sign that the weakness could be temporary: Consumer confidence rose in November to its highest level in five years.
But economists point out that consumers may be forced to make storm-related repairs a priority. That could cut into holiday sales.
Diane Swonk, chief economist at Mesirow Financial, said that Manhattan accounts for nearly 20 percent of spending nationwide at luxury retailers. “Much of that will be shifted towards repairs and rebuilding,” she added.
Chris Christopher, an economist at IHS Global Insight, reduced his forecast for holiday shopping to a gain of 4 percent compared with last year, down from 4.5 percent. He cited Sandy’s disruptions and potential consumer concerns about higher taxes for the downgrade. Some merchants have already begun discounting.
Macy’s, which operates more than 800 stores, said last week that it has extended promotions in the Northeast because Sandy disrupted sales. The Cincinnati-based department store chain also said that fourth-quarter profits would be below analysts' expectations.