Consumers tightfisted in October

WASHINGTON — Americans cut back on spending in October while their income remained flat, due in part to disruptions from Hurricane Sandy that stand to slow economic growth for the rest of the year.

Consumer spending dropped 0.2 percent in October, the Commerce Department said Friday. It was the weakest figure since May, and it compared with a 0.8 percent spending increase in September.

Income had risen 0.4 percent in September.

Consumers also may be scaling back on spending because of fears about the “fiscal cliff.” That’s the name for automatic tax increases and spending cuts that will take effect in January if Congress and the Obama administration fail to strike a budget deal by then.

“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.”

Stocks closed slightly higher Friday, erasing losses in the final 15 minutes of trading. The Dow Jones industrial average rose 3.76 points, or less than 0.1 percent, to 13,025.58.

Work interruptions caused by Sandy reduced wages and salaries in October by about $18.2 billion, the government said. The storm affected 24 states, with the most severe damage in New York and New Jersey.

“The upshot is that although both incomes and spending will probably bounce back in November, the underlying trend is weak,” said Paul Dales, senior U.S. economist at Capital Economics.

The depressed spending figures suggest that the economy is growing more slowly in the October-December quarter than it did in the July-September quarter. Consumer spending drives nearly 70 percent of economic activity.

Dales predicts U.S. economic growth will tumble from the 2.7 percent annual rate in the July-September quarter to a weak 1 percent in the October-December period. That’s too low to lower the nation’s unemployment rate, now at 7.9 percent.

Freight company CSX Corp. in Norfolk, Va., has furloughed hundreds of workers and put about 400 locomotives out of service in response to soft demand, caused in part by Sandy’s disruptions.

“Our international business is continuing to be very strong, but on the domestic side, we have seen significant drop-off here in the fourth quarter in terms of our volumes,” Chief Financial Officer Fredrik Eliasson said at a Wednesday conference. “Clearly part of that is because of the impact from Hurricane Sandy.”

Sandy closed as many as 230 Brown Shoe Co. stores, according to Diane Sullivan, president and chief executive officer of the St. Louis-based company. While all but four locations reopened 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.

Even discounting the effects of Sandy, income and spending gains would have been meager. Income would have risen a still-weak 0.1 percent. Spending would have been essentially flat, Dales estimated.

After-tax income adjusted for inflation fell 0.1 percent in October. And spending, when adjusted for inflation, dropped 0.3 percent — the biggest decline in three years.

The saving rate edged up slightly to 3.4 percent of after-tax income in October, compared with 3.3 percent in September.

Many economists say growth will rebound in the New Year once the rebuilding phase begins in the Northeast.

And if President Barack Obama and Congress can reach a budget deal to avert the fiscal cliff, some economists, including Federal Reserve Chairman Ben Bernanke, are predicting a strong year for the economy.

Still, the storm has slowed sales in the nation’s most densely populated region ahead of the crucial Christmas shopping season.

The International Council of Shopping Centers said 18 major retailers reported sales rose 1.7 percent in November compared with the same period a year ago. The group had been expecting sales growth between 4.5 percent and 5.5 percent.

The economic damage from the storm may be starting to fade, though. Retailers are reporting solid sales over the Thanksgiving Day holiday weekend.

And applications for unemployment benefits have fallen from an 18-month high in the first week of November. That surge was driven by applications in New York, New Jersey, Pennsylvania and Connecticut.

Still, the increase in unemployment applications early in the month will likely depress job growth for November. Many economists predict that net job growth for November will range between 25,000 and 75,000 — well below the 171,000 jobs added in October.

Business activity expanded in November for the first time in three months, an indication Sandy was less damaging to the economy nationally.

The MNI Chicago Report’s business barometer, released Friday, rose to 50.4 from 49.9 in October. A reading of 50 is the dividing line between expansion and contraction.

It’s “better than what we’ve been seeing,” said Carl Riccadonna, senior U.S. economist at Deutsche Bank Securities Inc. in New York. The economy “is lukewarm right now.”

The reading contrasts with earlier reports from the Philadelphia and New York region that showed that Sandy, the largest Atlantic storm ever to hit the United States, had halted manufacturing in that part of the country.

Information for this article was contributed by Martin Crutsinger of The Associated Press and by Alex Kowalski and Lorraine Woellert of Bloomberg News.