By Jeffrey Sparshott & Paul Ziobro | The Wall Street Journal
Americans kept spending in the weeks before Washington's budget battles rocked consumer confidence, though the pace of gains suggests little chance of strong growth in the critical final months of the year.
Core retail sales, excluding autos, rose 0.4% in September as consumers stepped up spending on items such as restaurant meals and electronics, the Commerce Department said. Overall sales fell 0.1% in the month, primarily due to an auto-sales drop tied to the timing of Labor Day.
But an expected softening in October—amid a collapse in consumer confidence due to the government shutdown and weaker labor market—suggests a long-awaited pickup in economic growth may have to wait until next year.
"At best we'll see more of the same, but more of the same is hardly a sign of increased confidence or increasing economic growth," said Sterne Agee chief economist Lindsey Piegza.
The outlook of American households soured in October, according to the latest gauge released Tuesday by the Conference Board, a private research organization. The group's confidence index plunged to 71.2 in October from 80.2 in September as a debt-ceiling fight and 16-day partial shutdown of the federal government injected uncertainty into U.S. consumers and businesses.
U.S. Retail Sales
While the recent setbacks may prove to be temporary, they raised worries about the economy's trajectory heading into the holiday-shopping season. Many economists hoped the second half would offer a long-awaited jolt to economic activity. Instead, it is shaping up to provide more of the same moderate growth that has plagued the economy for most of the four-year recovery.
Retailers will be trying to lure wary customers with low prices during the holiday season, which accounts for about one-fifth of the industry's total annual sales.
Retail giant Target Corp. will highlight its low prices in television commercials for the first time in more than a decade to address what Kathee Tesija, the retailer's executive vice president of merchandising, said continues to be a "tough macro environment" and "budget-conscious" consumer.
Niraj Shah, co-founder and chief executive of the online home-goods retailer Wayfair LLC, said consumers have come to expect heavy promotions. The economy hasn't recovered to the point that retailers can tone down the deals they offer, he said. Mr. Shah expects a focus on discounts to be a highlight of the holiday season, which will have six fewer days between Thanksgiving and Christmas than a year ago. "I don't know that retailers are going to wait around and blitz at the very end," he said.
Lower prices, though, are only one part of the equation. Softer job growth, weak wage gains and concerns about the next Washington fiscal showdown also are weighing on consumers.
The latest budget agreement reopened the government through Jan. 15 and suspended the debt limit until Feb. 7. Washington politicians rarely act before deadlines, creating the potential for heightened uncertainty for some businesses and consumers for months. And U.S. employers added only 148,000 jobs in September, a much slower pace than the first half of the year; weekly earnings, adjusted for inflation, were up only 1% in August from a year ago.
Many retailers have noted the growing caution among Americans but are hopeful reluctance to make purchases will fade now that Washington's policy battles have receded. "We began to see this impact in August, and it has persisted through October," Tommy Millner, chief executive of Cabela's Inc., an outdoor gear retailer, told analysts.
"It was probably just more the noise of the uncertainty and watching what was going on in Washington that may have distracted the consumer." Mr. Millner said. "As we look at the balance of the fourth quarter, the likelihood of more of that noise is probably lessened, thank goodness."
Early signs of consumer strength have been mixed. Morgan Stanley economist Ted Wieseman said that post-shutdown auto-sales numbers still look weak and traffic at shopping malls remained slow into the second half of the month. "We're not off to a strong start in the fourth quarter," Mr. Wieseman said.
Still, many consumers have the wherewithal to spend more, he added, boosted by rising home prices and a stronger stock market.
House prices were up nearly 13% in August from a year earlier, according to the Standard & Poor's/Case-Shiller Home Price Indices, returning average home prices to their mid-2004 levels.
History shows that hits to consumer confidence from political turmoil can dent spending in the short run, but they usually haven't translated into long-lasting setbacks. Indeed, some retailers saw no effect from the recent battles in Washington.
Newell Rubbermaid Inc. didn't see the looming government shutdown affect sales of its products, which include Sharpie markers, Calphalon cookware and its namesake storage containers. CEO Michael Polk said that trends remained strong in July, August and September in North America, where sales increased 4.2% in the latest period.
"Consumer confidence gets shaken up when these headlines become so silly," particularly for lower-income consumers, Mr. Polk said. Wealthier shoppers, meanwhile, are "more insulated" from that talk.