Retail sales managed a small increase in October as consumers struggled with falling confidence caused by a steep slump in housing and tighter credit conditions.
The Commerce Department reported Wednesday that retail sales edged up 0.2 percent in October, compared to the previous month. It was the weakest showing since a 0.1 percent rise in August and represented a significant slowdown from a 0.7 percent jump in September sales.
In a separate report, the Labor Department said inflation at the wholesale level rose a slight 0.1 percent in October, far below the 1.1 percent surge in September. The improvement reflected the fact that energy prices fell by 0.8 percent last month after having soared by 4.1 percent in September. However, that benign outcome is expected to be short-lived, given that crude oil costs have soared in recent days, trading briefly above $98 per barrel last week.
In other economic news, the government said that businesses increased their inventories held on shelves and backlots by 0.4 percent in September, the largest gain since a 0.5 percent rise in July. Inventories had risen by a solid 0.3 percent in August.
The inventory increase was in line with expectations and supported the view that restocking bolstered economic growth in the July-September quarter. However, those gains are expected to fade in coming months if business confidence falters in the face of weaker consumer demand.
The inflation report showed that food costs continued to surge in October, rising by 1 percent, after an even bigger 1.5 percent September gain.
Core wholesale inflation, which excludes food and energy, was well-contained last month, showing no change after a tiny 0.1 percent gain in September.
The weakness in retail sales last month reflected a 0.5 percent drop in sales at department stores, where merchants were hurt by a wamer-than-normal October which depressed sales of winter clothing.
Retailers are facing bleak prospects for Christmas with consumer confidence plunging in the face of soaring gasoline prices, slumping home sales and tougher lending standards being imposed by financial institutions in the wake of a serious credit crunch.
Analysts attributed much of the small October gain in retail sales to higher prices for gasoline and food rather than an actual increase in demand.
Ian Shepherdson, chief U.S. analyst at High Frequency Economics, said core retail sales have risen over the past three months at the slowest annualized rate in five years, since the time the country was struggling to emerge from the last recession. He predicted this weakness would intensify.
“We expect a further deterioration as consumers cut back in the face of soaring gas prices, falling stock prices and the continued disaster in housing,” Shepherdson said. “The holiday season will be terrible.”
Consumer spending is closely watched since it accounts for two-thirds of total economic activity. The overall economy is expected to slow dramatically in the current quarter and the first three months of next year, a period which many economists see as the maximum danger period for a possible recession.
Analysts believe that overall economic growth will slow to around 1.5 percent at an annual rate in the final three months of this year, down from a 3.9 percent rise in the July-September quarter, as the housing slump continues to exert a toll on the economy.
Federal Reserve Chairman Ben Bernanke told the congressional Joint Economic Committee last week that the Fed was looking for a significant slowdown in coming months due to a longer-than-expected housing slump. But he said economic growth should rebound by mid-2008.
The small 0.1 percent rise in overall prices was better than the 0.3 percent gain that economists had expected. The government will report on consumer inflation on Thursday and the expectation is that the report will show prices rising by 0.3 percent in October, matching the September gain.
The 0.2 percent rise in retail sales in October was right in line with expectations.
In addition to the big drop in department store sales, sales at furniture stores were down a hefty 0.9 percent after an even bigger 1.3 percent drop in September. Sales of furniture and other housing-related items have been severely hurt by the slump in home sales.
Auto sales rose by 0.2 percent in October following a 1.8 percent rise in September. But analysts expect domestic automakers to continue to battle with slumping demand because of surging gasoline prices.