Thursday, November 15, 2001

Consumers shrugged off worries about jobs, anthrax, war and terrorism and flocked to the malls and showrooms, boosting retail sales by a record 7.1 percent.
The surprise spending revival from the bust following the September 11 terrorist attacks was powered by a 26.4 percent jump in auto sales also a record and owed much to interest-free financing as well as widespread discounting by retailers, the Commerce Department said. Sales at all stores and restaurants for the first time exceeded $300 billion.
The report stoked optimism in the financial markets and raised hopes that, despite a spate of bad news in the last two months that has dampened consumer spirits, Americans still can be enticed out of their homes by bargain deals and haven’t given up their love of shopping.
“It is testimony to both the resilience of the U.S. consumer and the power of free money,” said David Orr, chief economist with Wachovia Securities.
Thanks to the powerful lure of cost-free financing, he said, the increase in auto sales was four times greater than the previous record set in 1993. The success of the low-cost loan program has prompted General Motors and Ford to extend it to the end of the year in a move that analysts said will be good for economic growth.
Sizable gains also were seen in sales at hardware and garden stores, restaurants, sporting goods and health and personal care outlets. The spending spree coincides with a record drop in wholesale prices, the lowest gasoline prices in nearly two years and a rebound in the stock market favorable developments that consumers seized upon despite a steep rise in unemployment during the month.
Since consumers generate about two-thirds of economic activity, the report prompted rethinking among analysts who were predicting a deep downturn in the economy in the final three months of the year. Some revised their forecasts up to reflect a more robust consumer, but few said the bounce back in spending would be strong enough to lift the economy out of recession.
In fact, economic and political leaders took a step toward officially acknowledging a recession yesterday. Vice President Richard B. Cheney, in a speech to the U.S. Chamber of Commerce, became the highest-ranking Bush administration official to warn that a recession most likely is here as the economy appears to be shrinking in the final quarter of the year after declining 0.4 percent in the summer quarter.
Mr. Cheney’s warning in December that the economy might be “on the leading edge of a recession” provoked a controversy, but he may not have been far off the mark. The Cambridge, Mass., committee that is charged with determining when recessions start issued a statement late Tuesday suggesting that a downturn may have begun in April when the number of job cuts started outnumbering the number of new jobs created by employers.
Since that time, nearly 1 million jobs, or 0.7 percent of total employment, have been lost in what amounts to two-thirds the average job loss of the previous six U.S. recessions, according to the National Bureau of Economic Research’s Business Cycle Dating Committee. Two other reports on the industrial economy monitored by the committee have been signaling recession for a year.
The committee said personal incomes, adjusted for inflation, continue to grow, however, a major factor arguing against recession. Consumer purchasing power has been boosted by falling prices and steady wage gains averaging 4 percent a year and yesterday’s report illustrated how those favorable financial winds continue to support spending.
Consumers have become more cautious and cost-conscious, however, and some stores have fared better than others as a result. Discounters like Wal-Mart and Home Depot have emerged as the biggest winners, while high-end stores and some major department stores and chains have seen big drops in sales.
“Since September 11, our customers have returned to the stores,” Wal-Mart Chief Executive H. Lee Scott said yesterday in announcing a hearty 6.7 percent gain in sales over last year.
“There was a whole lot of spending going on in October,” even if consumers were being selective, said Richard Yamarone, economist with Argus Research Corp.
“The news has its dark side,” he added. “The markdowns that triggered the spending binge will play havoc with retailers’ profit margins. And, as joblessness continues to grow, the sustainability of the spending splurge is open to question.”
Debbie Johnson, economist with Deutsche Bank Alex. Brown, said interest-free auto sales are “great for consumers” but “very bad for auto profits” and cannot be sustained for long. The auto companies “are just borrowing from future sales,” she said. “We expect to lose the consumer early next year as job insecurity takes center stage.”

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