ANNYS SHIN The Washington Post | Posted: Sunday, November 30, 2008 12:00 am
WASHINGTON - The American consumer is scared stiff.
New economic data show that last month consumers were not tempted by retailers offering deep discounts. They were not enticed by lower home prices. And even though falling gas prices made their wallets a little fatter, they held on to their newfound savings and put off buying big-ticket items such as autos and home appliances.
"What consumers are not spending on gas, they are not taking to the mall," said University of Maryland economist Peter Morici. "They are not spending it on a car or home improvement, but to rebuild their savings."
Most of the figures were foreshadowed by data released earlier in the month and came as little surprise to analysts.
In Washington, the spending data added to the sense of urgency surrounding the Federal Reserve's new $800 billion plan to spur consumer spending by lowering mortgage rates and easing credit for consumers and small businesses.
Under the plan, the Federal Reserve will lend money to firms that provide student loans, auto loans and credit cards, as well as loans backed by the Small Business Administration. The market for those types of financing "essentially came to a halt in October," Treasury Secretary Henry Paulson said last week, leading to a lack of affordable credit that "weakens our economy."
Consumer spending, which is responsible for two-thirds of the nation's economic activity, dropped 1 percent in October, the Commerce Department reported, the largest decline since the terrorist attacks of Sept. 11, 2001. Taking inflation into account, it dropped by 0.5 percent, reflecting the steep drop in gas prices.
Even consumers who wanted to spend faced new constraints created by an expanding credit crunch. Many found it harder to get financing for a car or to obtain a student loan.
Credit card companies also raised rates or cut credit limits, affecting the calculus around everyday purchases.
Tighter credit standards kept buyers out of the housing market too, said Jed Smith, an economist for the National Association of Realtors. The group issued data that showed sales of existing homes fell in October by 3.1 percent, even as prices fell; the decrease in sales was more than what had been expected.
Prices for existing homes in the third quarter dropped by 16.6 percent compared with last year, according to the Case-Schiller Existing Home Price Index.
Foreclosures, which make up 35 to 40 percent of the market, were a major factor driving down prices, Smith said.
Analysts expect more foreclosures will also contribute to the glut of houses on the market already.
"We definitely expect home prices to decline further not just because of foreclosures but because there is still a lot of imbalance in the market … because of excess supply," said Orawin Velz, an economist with the Mortgage Bankers Association in Washington.
With fewer people buying homes and more people having a harder time accessing credit, orders for washing machines, refrigerators and other big ticket items fell in October by a bigger-than-expected margin of 6.2 percent.