Consumer Spending Slows as Holidays Begin

By Shobhana Chandra and Alex Kowalski – Nov 23, 2011

Americans pulled back on spending in October and manufacturers received fewer orders for durable goods, tempering expectations for a pickup in economic growth in the fourth quarter.

Consumer purchases, which account for 70 percent of the economy, increased 0.1 percent after a 0.7 percent gain in September, Commerce Department figures showed today in Washington. Bookings for equipment meant to last at least three years fell 0.7 percent after a 1.5 percent drop in September.

Unemployment stuck near 9 percent and confidence at recession levels prompted consumers to curb spending on the eve of the holiday shopping season. Manufacturers may see orders cool as the European sovereign-debt crisis roils financial markets and threatens the global expansion.

“We’re looking at holiday spending that won’t be great, but probably not a washout,” said Robert Dye, chief economist at Comerica Inc. in Dallas. “It’s an economy that still refuses to give strong, clear signals of recovery. Weaker global macroeconomic conditions are beginning to exert a drag on manufacturing.”

Stocks fell, sending the Standard & Poor’s 500 Index (SPX) down for a sixth straight day, as the cost of insuring European government debt against default rose to a record. The S&P 500 retreated 1.8 percent to 1,166.42 at 11:23 a.m. New York time. The U.S. 10-year Treasury yield rose 1 basis points, or 0.01 percentage point, to 1.93 percent.

Europe, China

Reports from Europe and Asia today added to concerns that the global expansion is faltering. European services and manufacturing shrank further, industrial orders had the biggest drop in almost three years and China’s factories showed signs of contraction.

In the U.S., consumer sentiment stagnated last week and claims for unemployment benefits increased from a seven-month low, other data showed today.

The Bloomberg Consumer Comfort Index was minus 50.1 in the week ended Nov. 20, compared with minus 50 a week earlier. The measure has been at minus 50 or less for nine of the past 10 weeks, a performance unprecedented in its 26-year history.

Thirty-five percent of those surveyed last week said it was a bad time to buy needed goods and services, tying the record set in January 1991. Twenty-three percent said their own finances were in “poor” shape, matching a record set three times in the past three years.
Jobless Claims

Applications for unemployment insurance payments increased by 2,000 in the week ended Nov. 19 to 393,000. The number of people on unemployment insurance rolls rose and those receiving emergency benefits declined.

Americans held back on spending last month as they built up their savings.

Wages and salaries increased 0.5 percent, the biggest gain since March, today’s income and spending report showed. The savings rate increased to 3.5 percent from 3.3 percent in September that was the lowest since December 2007.

Retailers like Macy’s Inc. (M) and Kohl’s Corp. have said they plan to use more discounts to lure shoppers. The day after the Thanksgiving holiday tomorrow is known as Black Friday, the unofficial start of the holiday shopping season.

More affluent consumers are holding up “pretty well,” Stephen Sadove, chief executive officer of luxury retailer Saks Inc. (SKS), said in a Bloomberg Television interview on Nov. 18. The average income of the Saks shopper is $200,000 a year, he said.

Other retailers are less optimistic as unemployment has hovered near or above 9 percent for more than two years and companies limit hiring.
‘Robust Improvement’

“Until the U.S. begins to see robust improvement in jobs and signs of recovery in the housing market, we believe consumer spending will likely continue to be soft and uneven,” Doug Scovanner, chief financial officer at Target Corp. (TGT), the second- largest U.S. discount retailer, said on a Nov. 16 call with analysts.

Manufacturers may benefit from businesses rushing to qualify for a government credit aimed at spurring investment. A tax break allowing companies to depreciate 100 percent of investment in capital outlays in 2011 falls to 50 percent in 2012.

“We are certainly seeing some uncertainty and some concern here and there, but on the broad nature we are not pessimistic,” Oscar Munoz, chief financial officer of railroad CSX Corp., said at a Nov. 9 investor conference. “A majority of customers are telling us sit tight, don’t pull back on resources, I’ve got enough business that I can keep working.”
Commercial Aircraft

Today’s report on durable goods showed orders excluding transportation equipment, like commercial aircraft, rose 0.7 percent after a 0.6 percent gain.

Bookings for non-defense capital goods excluding aircraft, a proxy for business investment in items such as computers, engines and communications gear, dropped 1.8 percent after a 0.9 percent gain the prior month that was smaller than previously estimated.

Last month’s decrease extends a pattern of declines early in a quarter. Demand for non-military capital goods have dropped in the first month of a quarter in all but three instances since the end of 2005.

Shipments of non-defense capital goods excluding aircraft, used in calculating gross domestic product, decreased 1.1 percent after decreasing 1 percent.

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