Sales by retailers show biggest drop in last 10 months

WASHINGTON -- Cautious consumers, shaken by the turbulent stock market and a possible war with Iraq, tightened their belts in September and pushed down sales at the nation's retailers by the largest amount in 10 months.

That news from the Commerce Department along with a separate, preliminary report Friday that showed Americans' confidence in the economy sank to a nine-year low in October, raised new questions about people's willingness to spend in the months ahead, including the holiday shopping season.

Consumer spending is the economy's lifeblood, accounting for two-thirds of all economic activity in the United States. Throughout last year's recession consumers kept buying, and they have been the main force keeping the economy going so far this year.

While most economists don't believe consumers will cut back spending dramatically and throw the economy back into recession, some believe they will have considerably less energy in the current October-December quarter and slow down the economic recovery.

"Consumer spending is fragile," said Sal Guatieri, economist with Bank of Montreal.

Stocks soar

But on Wall Street, stocks soared, lifted by positive earnings news from General Electric and a brokerage upgrade of IBM. The Dow Jones industrial average climbed 316.34 points to close at 7,850.29.

The 1.2 percent drop in retail sales in September from the previous month represented the largest decline since November and came after a solid 0.6 percent rise in August.

Much of the weakness in September's retail sales reflected a sharp 4.8 percent drop in automobile sales, but consumers also trimmed spending on furniture, electronics and clothes.

"I think consumers were standoffish or tightfisted because of the uncertainties plaguing the U.S. economy as well as the financial markets," said Richard Yamarone, economist with Argus Research Corp.

In other economic news, a preliminary report from the University of Michigan showed that its consumer sentiment index dropped to 80.4 in October, the lowest level since the fall of 1993, from 86.1 in September, said economists.

"The nine-year-low reading ... will reinforce fears that consumers are about to stop spending," said Maury Harris, chief economist at UBS Warburg. "The weakness can hardly bode well for consumption this autumn, but the link between sentiment and spending is only approximate."

Economists believed the drop in both confidence and retail sales reflected consumer anxiety over the roller coaster stock market, heightened fears about a war and concerns about the sluggish jobs market.

No inflation threat

A third report suggested that inflation remains low, which economists read as evidence inflation currently is no threat to the economy. Wholesale prices edged up by just 0.1 percent in September after being flat in August, the Labor Department reported.

The good news on inflation gives Federal Reserve policy-makers leeway to keep short-term interest rates low or possibly nudge them lower.

Worried about the pace of the economic recovery, the Federal Reserve, over the objections of two members, decided last month to hold short-term interest rates steady at 41-year lows. The two dissenters favored a rate cut, which would have been the first of the year.

Economists offered mixed opinions on whether the Fed will cut rates at its next meeting, on Nov. 6.

Many economists believe the economy picked up momentum in the third quarter, growing at a rate of at least 3 percent. However, many also think it will lose steam in the current quarter.

In September, auto sales dropped 4.8 percent, after a 1.5 percent rise, even as companies extended free-financing offers.

Excluding automobile sales, retail sales inched up by 0.1 percent in September.

Clothing store sales in September fell 0.9 percent. Furniture sales dropped 0.5 percent. Sales of electronics and appliances declined 0.3 percent. Bars and restaurants saw sales go down 0.4 percent, as did food stores. At general merchandise stores, including department stores, sales dipped 0.1 percent.