US retail sales fall sharply in October

2.8% drop darkens holiday prospects

Consumers hit the brakes hard in October, cutting back spending by the largest amount on record and giving retailers new reason to fret that this will be a grim holiday selling season.

Total retail sales dropped by 2.8 percent last month, led by a 5.5 percent plunge in car sales, according to a Commerce Department report yesterday. The last time consumers pulled back nearly this abruptly was in November 2001, when the economy halted after the terrorist attacks on Sept. 11; retail sales fell 2.65 percent that month.

With four straight months of consumers spending less, "We've dug a hole that's fairly deep," said Brian Bethune, chief US financial economist at IHS Global Insight in Lexington. "To get out of that hole it would take a miracle."

Stocks slumped on the retail news, reflecting a continuing sense that the economy will be slow into 2009. The Dow Jones industrial average fell 3.8 percent, or nearly 338 points, to close at 8,497.31. The Nasdaq fared worse, dropping 5 percent, while the Standard & Poor's 500 index lost 4.2 percent.

While auto sellers were worst hit in October, spending on furniture, clothing, sporting goods, and electronics also declined during the month.

It was a week in which electronics retailer Circuit City filed for Chapter 11 bankruptcy protection. And Best Buy Inc., the largest US electronics chain, cut its 2009 profit outlook, citing the worst times in memory. In a statement, Best Buy's chief executive, Brad Anderson, said: "Since mid-September, rapid, seismic changes in consumer behavior have created the most difficult climate we've ever seen. Best Buy simply can't adjust fast enough to maintain our earnings momentum for this year."

Customers interviewed as they browsed at the Best Buy on Newbury Street yesterday said they certainly were feeling cautious. Thomas Harrison, 22, said he wanted to buy a camcorder and digital camera in October, but figured he should wait for holiday sales, given the worsening state of the economy.

"I was ready to spend $300 or $400 for a camcorder, but I decided to wait," said Harrison, who works in retail. And he's planning to spend less on the people on his Christmas list this year, he said. Instead of buying her jewelry, he's going to make his mother a family photo album.

And Oliver Jones, 55, a senior accountant at John Hancock, said between paper losses in the stock market and rising utility bills, his family is cutting back. He said he took one of the family vehicles off the road and is taking the subway to work from his home in Milton. As for Christmas, his 15-year-old daughter and 12-year-old son have given him their wish lists, but he's negotiating them down. His son wants four video games, Jones said. "I'd get all four last year, but this time I'm buying two."

Tony Gao, a marketing professor at Northeastern University's business school, said US consumers are setting more sober priorities for their purchases. "A lot of families have been impacted, even though they still have jobs. They're not sure how long their jobs will last," Gao said.

To attract shoppers, some retailers are aggressively slashing prices and marketing. For instance, Norton-based retailer Bernie and Phyl's Furniture is running television ads that directly address the economic slowdown. On its website, the company is offering a 10 percent discount to customers after they spend $999.

"We just want to be very careful to recognize that our customers are going through a difficult time," said Paul Salafia, the president of Bernie and Phyl's ad agency, Advertising Management Services in Andover. "We wanted to tell them we'd tighten our belts and settle for a little less profit if we have to."

Other retailers are tightening their own belts, said Bethune, the Global Insight economist. "What they're doing right now is laying off people or just not hiring," he said. "They're consolidating stores. They're not going to order a lot of inventory. In this environment, the last thing they want to do is get caught with excess inventory."

That's causing the chain reaction that holds the broader economy back. As orders slump, manufacturers are hit and fewer workers are needed to make their products. The beleaguered auto industry took it on the chin in October, as consumers bought fewer cars, even as gas prices dropped precipitously - the one bright point in the spending picture for consumers. Americans spent 12.7 percent less at the pump in October than in September, according to the government, as gas prices fell 90 cents per gallon, on average, to $2.87.

Lower gas prices will help the consumer, Bethune said. "But it's like a snowball rolling down a hill. You can put up a snow fence, but it doesn't stop the snowball ultimately from finding its way to bottom of the hill."

Beth Healy can be reached at bhealy@globe.com.