Retail Sales, Deloitte Consumer Spending Index Plunge

Retail sales dropped sharply in October as consumers cut back on their spending, according to a report published by the U.S. Department of Commerce Friday.

At the same time, The Deloitte Research Leading Index of Consumer Spending fell into negative territory in October, primarily due to substantial increases in unemployment claims and continued softness in the housing market, the company reported.

Consumer spending for October was $363.7 billion, a drop of 2.8% from September and 4.1% from October 2007, the Department of Commerce reported.

The 2.8% decrease was the fourth consecutive monthly drop and the biggest since records began in 1992, the Commerce Department said.

Total sales for the August through October 2008 period were down 1.3% from the same period a year ago, the government reported.

Also according to the report, motor vehicle and parts dealers’ sales were down 23.4% from October 2007 and sales of furniture and home furnishings stores sales were down 13.5% from last year.

Purchases at automobile dealerships and parts stores plunged 5.5% in October from September after falling 4.8% in September from August.

Gas station sales decreased 13%, also the most ever, in part reflecting a $1-per-gallon drop in the average cost of gasoline, according to the Department of Commerce.

Excluding gas, retail sales fell 1.5%, the report said.

The National Retail Federation also reported a drop in October consumer spending last week, but not as sharp as the Commerce Department’s report.

Retail industry sales for October—which exclude automobiles, gas stations, and restaurants—decreased 0.5% seasonally adjusted from September while increasing 1.3% unadjusted year-over-year, the NRF reported.

The discrepancy in the Commerce Department’s report and NRF’s retail industry sales numbers is based on major declines in the autos category, which the NRF does not include in its measures.

“Consumers went into hibernation in October while concerns about the economy were at a peak,” said NRF chief economist Rosalind Wells in a statement. “As economic uncertainty went from bad to worse, shoppers pulled back on everything but the basics to weather the storm.”

The NRF said it continues to forecast meager holiday sales growth of 2.2% in November and December.

Meanwhile, in an indication of more bad news to come, Deloitte’s consumer spending index fell to minus 10%, from a revised gain of 0.54% a month ago, the company reported.

This is the first time Deloitte’s consumer spending index—comprising four components: tax burden, initial unemployment claims, real wages and real home prices—has produced a negative reading since October 1980, the company reported. In the past three months, the index has fallen 1.75%, the sharpest decline since October 1990, according to Deloitte.

“Given the credit crunch and the impact it’s having, retailers need a strong focus on cash flow management this holiday season,” said Stacy Janiak, vice chairman and U.S. retail leader, Deloitte, in a statement. “At the same time, it’s important to have a strategy and stick with it. While it’s tempting to match or beat competitors’ aggressive promotions, that approach can exact a heavy toll on profits. Retailers should be very strategic in making changes to their planned holiday promotions to limit the adverse margin impact as much as possible. Cost containment and labor management should also remain top of mind.”

According to Deloitte:

*The consumer tax burden continues to fall with the weakening of the economy.

*Initial unemployment claims shot up in the most recent month and are now up 51% from a year ago.

*Real wage growth rebounded in the most recent month due to falling energy prices. However, real wages are still down 2% from a year ago.

*Real home prices fell by 13.4% in October. Home mortgage refinancing has all but disappeared, reducing household cash flow. Inventories of unsold homes, while down slightly, are still high. A contraction in mortgage credit is limiting home buying. Until home prices stabilize, housing will remain a major drag on consumer spending.