Consumer Spending in U.S. Declines as Sandy Reduces Wages

Americans unexpectedly pared spending in October as superstorm Sandy depressed wages, showing the world’s largest economy is cooling as lawmakers seek ways to avoid the so-called fiscal cliff.

The 0.2 percent decrease in purchases followed a 0.8 percent gain, Commerce Department figures showed in Washington. Adjusted for inflation, the decline was 0.3 percent, the biggest in more than three years. Incomes were little changed last month as the biggest Atlantic storm to ever hit the U.S. shaved $18.2 billion in wages at an annual rate.

“The outlook for consumer spending is tenuous,” said Jacob Oubina, a senior economist at RBC Capital Markets LLC in New York. “We’re already on soft footing and you’re now in an environment where the risks to confidence are increasing because of the fiscal cliff.”

The possibility that lawmakers will not find common ground to prevent about $607 billion in tax increases and government spending cuts from taking effect next year raises the risk that gains in consumer confidence will be reversed as the December deadline nears. Combined with revisions yesterday showing household spending decelerated last quarter, today’s data help explain why the Federal Reserve has geared its policy toward stoking job growth.

Also today, the MNI Chicago Report’s business barometer rose to 50.4 in November from 49.9 a month earlier. A reading of 50 marks the dividing line between expansion and contraction. The group’s measure of orders dropped to the lowest level since the expansion began in June 2009.

Stocks closed higher, erasing losses in the final 15 minutes of trading, as investors bought shares before changes to MSCI Inc. indexes. The Standard & Poor’s 500 Index climbed less than 0.1 percent to 1,416.18 at the close in New York.

Growth Projections

Economists at JPMorgan Chase & Co. and Goldman Sachs & Co. lowered their tracking estimates of fourth-quarter growth after today’s report. JPMorgan reduced its projection to 1.5 percent from 2 percent, according to an e-mail from chief U.S. economist Michael Feroli. Goldman Sachs economists cut their growth forecast to 1.3 percent from 1.5 percent.

Household purchases climbed at a 1.4 percent annual rate in the third quarter, the smallest gain in more than a year and down from a previously reported 2 percent advance, Commerce Department data showed yesterday. Spending increased at a 1.5 percent pace in the second quarter.

Wages and salaries fell 0.2 percent in October as Sandy interrupted work schedules, after a 0.3 percent gain a month earlier.

Inflation-adjusted spending on durable goods, including automobiles, decreased 1.7 percent in October after a 2.2 percent gain. Outlays for non-durable goods, which include gasoline, fell 0.3 percent last month.

Store Closings

Sandy closed as many as 230 stores owned by Brown Shoe Co., according to Diane Sullivan, the St. Louis-based company’s president and chief executive officer. While all but four locations re-opened within nine days, the operator of the Famous Footwear chain expects fourth-quarter sales were cut by about $2.5 million, Sullivan said during a Nov. 20 earnings call.

The storm affected 106 Urban Outfitters Inc. stores and curtailed online shopping, reducing fiscal third-quarter revenue by about 1 percentage point, according to Chief Financial Officer Frank Conforti. The impact will be smaller in the current quarter, he said on a Nov. 19 call with analysts.

Companies are also dealing with weaker global demand, helping explain the limited improvement in the MNI Chicago Report’s business barometer after a reading of 49.9 in October. The gauge of new orders fell to 45.3, the weakest reading since June 2009, from 50.6 in October. Measures of employment and production picked up.

Ganesh Moorthy, chief operating officer at Chandler, Arizona-based Microchip Technology Inc., said it’s too soon to tell whether the business environment has reached a low.

Europe’s Economy

“We have Europe in a recession and we’re not quite sure when that all turns around,” Moorthy said at a Nov. 28 conference. “We have some of the growing economies China, India that all have their own issues as well,” he said. “So we were not ready and we are not ready to call a bottom.”

Germany, Europe’s largest economy, will be tipped into a recession as the sovereign debt crisis roiling its neighbors extends into 2013, according to the Bloomberg Global Poll.

With the world economy cooling and American lawmakers struggling to avert the fiscal cliff, Fed officials are keeping policy accommodative.

“Although the economy continues to expand, we must grow faster if we are to put all of our jobless workers and idle businesses back to work,” William Dudley, president of the Federal Reserve Bank of New York, said yesterday.

(Updates with closing stocks in sixth paragraph.)
    Before it's here, it's on the Bloomberg Terminal. LEARN MORE