Gloomy news gives US little to be thankful for

The United States consumer freeze deepened on Wednesday as the biggest fall in spending since the 2001 terrorist attacks gave the Thanksgiving shopping season its worst possible start.

Americans cut their high-street expenditure by 1% in October, a worse-than-expected decline and the steepest in seven years. The figures from the Commerce Department came 24 hours after the US Treasury secretary, Henry Paulson, pumped $200-billion into the consumer credit market, citing a halt in consumer lending throughout October.

There was also more bad news from the housing market, where the economic downturn originated, with new home sales falling to their lowest level since 1991.

The consumer outlook has become a focus of concern for economists and US authorities as the year’s peak shopping season begins. Tiffany, the upmarket jewellery retailer and owner of the eponymous Manhattan store, slashed its full-year sales forecast on Wednesday and announced plans to cut staff as the worsening economy turns off even the most affluent consumers.
“It is impossible to know when consumer confidence will be restored,” said Michael Kowalski, Tiffany chief executive.

The downbeat Tiffany outlook added to fears that the Thanksgiving weekend, the biggest shopping period of the year, will be the flattest since the early 1990s. The month from Thanksgiving to Christmas accounts for up to 40% of some retailers’ profits and, with consumer spending accounting for more than two-thirds of US economic activity, economists fear that Black Friday—the day after Thanksgiving, and traditionally one of the year’s biggest shopping sprees—will confirm that the US consumer is hibernating.

President-elect Barack Obama attempted to reassure consumers that the US economy would “get through this” and warned that reining in spending in the run-up to Christmas could exacerbate the downturn. “What we don’t want to do is get caught up in a spiral where people pull back from the economy, businesses then pull back, jobs are reduced and we get into a downward spiral,” he said.

Obama, who is now giving daily press conferences on the economy, also appointed a former Federal Reserve chairperson, 81-year-old Paul Volcker, as head of a new White House panel to help create jobs and stabilise the financial system.

As head of the central bank in the 1980s, Volcker steered the US through a severe recession, which he had helped to create by raising interest rates to kill inflation.

Economists expect Obama to inherit an even worse consumer outlook when he takes office in January. Consumer spending is forecast to decline further as the jobless rate increases, despite a small drop in unemployment benefit claims last week. “The consumer spending numbers will get worse as the unemployment situation gets worse,” said Nariman Behravesh, chief economist at the forecasting group IHS Global Insight.

The fall in spending is underpinned by deteriorating consumer confidence, a survey of consumer confidence by Reuters and the University of Michigan said on Wednesday. It showed that confidence for November fell to 55,3 from 57,6 last month, hitting its lowest level since 1980.

In other economic news, demand for items such as fridges and cars also fell by a significant margin last month. New orders for durable goods slumped by 6,2%—more than double most Wall Street forecasts.

Wachovia, the Charlotte-based banking group, said: “The consumer is holding back and trying to get a better grip on their balance sheet. We suspect that the trend of spending falling and savings increasing will go on for some time yet.”

Economists said the decline in factory orders would result in manufacturers hiring fewer workers. However, there was one bright spot amid the latest bout of negative data, with the number of new claims for unemployment benefits falling by 14 000 last week to 529 000. Nonetheless, any figure above 500 000 is considered a strong indication of an economy in recession.

The gloomy economic data was rounded off by a drop of 5,3% in new home sales last month, reaching the lowest level in nearly 18 years. The average price of a new home also fell by 7% to $218 000, recording a four-year low.

Earlier this week, US authorities pre-empted Wednesday’s slew of bad news on consumer spending and housing by pumping a further $800-billion in the credit markets. The Federal Reserve committed $600-billion to buying up toxic mortgage assets and the US treasury underwrote a $200-billion credit line to the securities markets for car, student and credit card loans.

However, investors were warned on Wednesday that more bad news from the stricken banking sector was imminent. Meredith Whitney, the Wall Street analyst who predicted the near-downfall of Citigroup, warned that major banks would have to write down a further $44-billion on their balance sheets in the final quarter of the year.

The influential Oppenheimer and Company analyst also warned that about 30% of the new capital raised by Bank of America, Citigroup and JP Morgan would have to be poured into covering losses on credit cards.—

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