Superstorm Sandy combined with cautious consumers to lower retail sales in October and raise concerns about weaker economic growth and a tepid holiday shopping season.
Consumers may also be holding back because of anxiety over big tax increases and spending cuts — known as the "fiscal cliff" — that will take effect in January unless Congress and the White House reach a budget deal by then.
Retail sales dropped 0.3 percent last month after three months of gains, the Commerce Department said Wednesday. Sales at auto dealers fell 1.5 percent, the most in more than a year.
The storm depressed car sales and slowed business in the Northeast at the end of the month, economists said. The government said Sandy forced some stores and restaurants to close and lose business, while others reported higher sales ahead of the storm as people bought supplies.
Online and catalog purchases fell 1.8 percent, the most in a year. Widespread power outages prevented some online shopping.
But sales slowed in eight of the 13 broad categories tracked by the government. Electronics, building supplies and clothing stores all posted lower sales. The broad declines suggest October's weakness went beyond the storm.
"Looking past (Sandy's) impact, U.S. consumers appeared to dial it back a notch," said Robert Kavcic, an economist at BMO Capital Markets. "There was relatively broad-based weakness in this report."
The retail sales report is the government's first look at consumer spending, which drives 70 percent of economic activity. Economists say the November and December sales figures will provide a better picture of the economy's health.
If sales rebound, that would suggest the October decline was a temporary lull exacerbated by the storm. But ongoing weakness would show that consumers are scaling back on spending, perhaps because of concerns that their taxes will increase next year.
Retailers traditionally see a lull in October because consumers take a break before buying holiday gifts. But Americans' fixation on the presidential election and Superstorm Sandy worsened the trend, said Ken Perkins, president of Retail Metrics, a research firm.
The average shopper is also starting to worry about the fiscal cliff, Perkins said. He expects stores will step up discounting in the coming weeks to make up for lost business.
Most economists expect sales to rebound in the coming months. That's because Americans will begin to repair the damage from Sandy and replace cars that were destroyed in the storm.
One hopeful sign that the weakness could be temporary: Consumer confidence rose in November to its highest level in five years.
But economists point out that consumers may be forced to make storm-related repairs a priority. That could cut into holiday sales.
Diane Swonk, chief economist at Mesirow Financial, said that Manhattan accounts for nearly 20 percent of spending nationwide at luxury retailers. "Much of that will be shifted towards repairs and rebuilding," she added.
Chris Christopher, an economist at IHS Global Insight, reduced his forecast for holiday shopping to a gain of 4 percent compared with last year, down from 4.5 percent. He cited Sandy's disruptions and potential consumer concerns about higher taxes for the downgrade.
Some merchants have already begun discounting, after seeing signs of slower sales in November.
Macy's Inc., which operates more than 800 stores, said last week that it has extended promotions in the Northeast region because Sandy disrupted sales. The Cincinnati-based department store chain also said that fourth-quarter profits would be below analysts' expectations.
Luxury merchant Saks Inc., which operates Saks Fifth Avenue, said Tuesday that it will increase discounts after forecasting sales at stores open for at least a year would be unchanged for the holiday period.
Steve Sadove, chairman and CEO of Saks, told investors that sales typically rebound after an event like Sandy, but the question is how long it will take.
"We saw an immediate loss of business during the storm, and we are still generating lower sales in many of the locations," he added. Stores affected by Sandy accounted for 40 percent of Saks' total revenues. The company's online business was also hurt. Even sales in Florida were indirectly affected because many Northeast customers have ties to that market, Saks said.
The October decline followed the best two-month stretch for retail sales in two years, a reflection of higher consumer confidence and a slowly healing job market.
Prior to the storm, business appeared more optimistic that sales would stay strong. They rebuilt their stockpiles of goods at a healthy pace in September, according to a separate report released Wednesday. But most economists expect that restocking will slow in the final three months of the year, partly because of last month's weaker retail sales.
Slower inventory rebuilding and modest consumer spending are big reasons why economists expect growth will weaken to around a 1.5 percent annual rate in the October-December quarter. That's below the government's estimate last month of 2 percent. Analysts expect that figure will be revised upward to about 3 percent when the government releases its second estimate Nov. 29.
Consumers should benefit from low inflation in the coming months, according to a third report Wednesday.
Wholesale prices fell 0.2 percent in October, the first decline since May, the Labor Department said. A big drop in gasoline and other energy prices offset a rise in food costs.
Excluding volatile food and energy costs, prices fell 0.2 percent in October. That's the biggest drop in core prices in two years. Over the past year, core prices were up a moderate 2.1 percent, evidence inflation remains under control. Wholesale prices reflect the cost of items before they reach the consumer.
D'Innocenzio reported from New York.
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