Strength in Autos Lifts Retail Sales

By KELLY EVANS Retailers, including car dealers and restaurants, saw sales improve in October, a glimmer of hope before the critical holiday season although unemployment still threatens spending. Retail sales rose 1.4% in October from the prior month to a seasonally adjusted $347.5 billion, the Commerce Department said Monday, following a downwardly revised 2.3% decline in September. The increase was driven almost entirely by higher auto sales in October as demand returned following a sharp drop after the expiration of the government's cash-for-clunkers program. Beyond autos, sales at clothing stores, restaurants and various other merchandisers also rose last month, despite the nation's worsening unemployment. "The concern was that we'd get a big pullback in the fourth quarter," after the clunkers program ended, said Conrad DeQuadros, an economist with RDQ Economics in New York. "Fortunately, the data are not shaping up that way," he said. The figures put consumer spending, the biggest component of the U.S. economy, on track to grow 1.5% to 2% during the final three months of the year, following 3.4% growth in the third quarter, which was boosted in part by spending on autos as consumers rushed to cash in on rebates. "It's certainly better than what we had anticipated," said J.P. Morgan economist Abiel Reinhart. While the nation's unemployment rate hit 10.2% in October, a 26-year high, a rebound in stock markets and home prices in parts of the country is helping prop up spending, Mr. Reinhart said. Although U.S. household wealth fell sharply through the first quarter of this year, it has rebounded a bit in recent months. Yet he cautioned that even a 2% to 2.5% gain in consumer spending, which his firm forecasts for much of 2010, "is still pretty weak" by historical standards and reflects rising unemployment along with banks' reluctance to make consumer loans. Furthermore, forecasters in a survey released Monday by the Federal Reserve Bank of Philadelphia see the U.S. unemployment rate holding above 10% through September 2010, as the economy's expected 2.4% growth rate falls short of what they say is needed to prevent more job losses. For now, though, rising sales are helping businesses pare down accumulated inventories, paving the way for an increase in future orders and production. A gauge of business inventories, also released Monday, showed levels fell 0.4% in September to $1.3 trillion, while the ratio of inventory to sales held steady at a 1.32 months' supply from a high of 1.46 in January. The decline in September inventory levels, particularly outside the auto sector, will be one factor prompting a downward revision to the government's first estimate of third quarter gross domestic product, said Mr. DeQuadros. His firm now estimates GDP grew at a 2.6% inflation-adjusted, annualized rate, compared to the government's initial 3.5% tally.