October US Consumer Spending: Americans Cut Back

U.S. consumers spent less in October, the first contraction seen in retail spending in three months. But don't blame the weather, unless you mean the chilly climate in Washington.

The 0.3 percent overall decline entering the first month of the fourth quarter was lower than the 0.2 percent growth economists polled by Thomson Reuters had expected and considerably down from the 1.3 percent year-to-year growth in September.

“While we anticipate some positive payback later in the quarter, this, alongside the decline in unit vehicle sales, suggests a soft start to Q4 for real consumption,” said economist Peter Newland of Barlcays Research in a note Wednesday.

Auto sales fell 1.5 percent and building materials declined 1.9 percent. Excluding these as well as gasoline purchasing, underlying retail sales fell by 0.1 percent compared with 0.8 percent in September.

What does this mean as the country chugs toward the peak shopping season and many retail operations start to turn a profit for the year?

Many economists are pointing to Congress, saying the longer lawmakers allow uncertainties about impending tax hikes and across-the-board spending cuts, the so-called fiscal cliff, the longer consumer confidence could be dragged on concerns about higher tax bills and possibly even a job-killing return to negative GDP growth.

It’s a sign that consumers continue – as they have all year – to be cautious and scrupulous in their buying habits, and the country continues its path to recovery from the last recession with modest but insufficient jobs growth.

“October’s retail sales figures suggest that consumption has lost a bit of the momentum ahead of the crucial holiday shopping season,” said analyst Paul Dales of Capital Economics in a research note on Wednesday. “If it was due to the effects of Hurricane Sandy, then sales will presumably bounce back. But if it’s due to the fiscal cliff, sales could remain weak until Congress reaches a deal.”

Sandy did have an effect toward the end of October, due to power outages and a shutdown of commerce in some places. Vehicles sales, which entered the month soft, ended the month hit by a storm-related downturn in the Northeast.

But most of those auto sales are likely to be made in the near future. Storm-related purchasing – whether it was stocking up beforehand at the grocery store or buying items to repair storm damage to homes and businesses after – likely will impact consumer spending in November.

“While there are some likely effects from Hurricane Sandy, the direct impact on this month’s report is difficult to measure,” said a research note from Wells Fargo on Wednesday. “Building materials declined 1.9 percent, which we would have expected to rise ahead of the storm.”

Whatever the effects of the storm on consumer sentiment, including the boost to building materials purchases likely to be seen in November, the storm’s effects on national consumer spending are going to be more temporary than the longer-term, broader concerns that could eventually beat down gross domestic product after the holiday season. Well Fargo economists estimate about 2.7 percent GDP growth in the fourth quarter followed by a steep dropoff to 0.6 percent in first quarter of next year, due to what they estimate is the fiscal cliff pressure on consumers following the scheduled end to the temporary 2 percent payroll-tax reduction, the end to unemployment benefits for many and an increase in capital gains taxes.