U.S. consumers put away their wallets

Nervous U.S. consumers clamped down on their spending last month as retail sales took their largest drop on record.

The U.S. Commerce Department said Friday that consumer spending dropped by 2.8 per cent in October, beating the previous largest drop of 2.65 per cent seen in November 2001.

October's retreat surpassed the expectations of economists, who had been looking for a drop of 2.1 per cent.

A 5.5 per cent plunge in auto sales was the biggest seen since August 2005. Excluding auto sales, retail activity dropped by 2.2 per cent, which was also a record.

In addition to automobiles, sales also dropped for many other types of products. Furniture store sales retreated by 2.5 per cent, while specialty clothing stores saw a drop of 1.4 per cent. Sales at general merchandise stores, such as Wal-Mart and department stores, dropped by 0.4 per cent.

Consumer spending accounts for roughly two-thirds of economic activity, so the bleak October retail report does not bode well for the overall fourth-quarter outlook for U.S. gross domestic product.

In the July-September quarter, U.S. GDP fell at an annual rate of 0.3 per cent, and economists expect the fourth-quarter rate will be worse. Some observers expect poor economic performance in the U.S. through the first half of 2009, and, in turn, lead to the worst recession to hit the U.S. since 1981-82.

"Looking ahead, with U.S. consumers continuing to navigate against the headwinds of a slowing economy, tighter lending conditions and a rapidly deteriorating labour market, there is hardly any hope that consumer spending will recover in a meaningful way any time soon," said Millan Mulraine, an economics strategist at TD Securities.

Mulraine said that strengthens the case for further easing of monetary policy by the Federal Reserve as it makes its next interest rate decision in December.