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Economy Sinking Deeper

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By MARTIN CRUTSINGER

The Associated Press

Published: November 15, 2008

WASHINGTON - The worst monthly drop on record for retail sales set off new alarm bells about the economy Friday, stepping up pressure on policymakers to figure out how to combat what increasingly looks to be a severe recession.

A Commerce Department report showed American consumers in full flight, with retail sales falling a record 2.8 percent in October from September. Plunging auto sales led the way, but there were declines in virtually every spending category.

"Consumers are battening down the hatches and this reflects the depth of the downturn," said Mark Zandi, chief economist at Moody's Economy.com. "All households are panicked and cutting back - not just lower and middle-income families who are struggling with a bad job market and falling home values, but upper-income families who are upset with their diminished nest eggs."

Plano, Texas-based J.C. Penney said Friday that third-quarter profit fell 52 percent, hurt by weak mall traffic and lower consumer spending. The company said it expects the tough environment to last well into next year and predicted that sales would drop 7 percent to 9 percent during the fourth quarter - usually a retailer's best time of year.

Department stores have been among the hardest hit retailers as consumers cut back their spending and trade down to discounters for necessities. A day earlier, Kohl's Corp. said third-quarter profit fell 17 percent and cut its outlook for what it called "the most challenging" holiday season in years. Likewise, upscale chain Nordstrom Inc. said third-quarter profit fell 57 percent and it slashed its full-year forecast.

J.C. Penney said it was increasing its marketing and improving its customer service, including extending store hours, during the holidays.

"Our focus is on delivering a great customer experience," Ken Hicks, the company's chief merchandising officer and president, said during a conference call. "We are fully aware of the challenges facing our customers this holiday season."

J.C. Penney said it now expects fourth-quarter earnings of 90 cents to $1.05 per share. That fell well short of the $1.32 per share analysts polled by Thomson Reuters had expected.

Teen apparel retailer Abercrombie & Fitch Co., meanwhile, reported third-quarter profit fell 46 percent to $63.9 million, hurt by weak demand for its girls' tops and the overall consumer spending slowdown.

Abercrombie said fourth-quarter sales in stores open at least one year, a key retail metric known as same-store sales, could be down about 26 percent. It expects to earn between $1 and $1.05 per share in the period, a good deal lower than the $1.57 per share analysts expected. For the year, it predicts earnings of $3.27 to $3.32 per share, while analysts expect $3.81 per share.

Friday's woes cap a week of dismal news for the retail sector, beginning with electronics retailer Circuit City Stores Inc. filing for bankruptcy protection on Monday.

Even Wal-Mart Stores Inc., which has performed better than most other retailers as consumers hunt for bargains, is not immune. While the company reported Thursday that third-quarter profit rose 10 percent, helped by positive response to early Christmas promotions, it lowered its profit outlook for the fiscal year amid the difficult economy and because of the stronger dollar.

Wall Street had another day of lurching highs and lows. The Dow Jones industrial average, which was higher for the day as late as 45 minutes before the closing bell, took a nosedive and finished down 338 points, or nearly 4 percent.

The economy shrank slightly in the third quarter, and many economists think the downturn has accelerated since then. Some are forecasting the contraction will continue into mid-2009, which would make it the most serve recession since 1981-82.

In what has become a steady stream of layoff notices, Sun Microsystems Inc. announced Friday that it plans to cut up to 6,000 jobs, or 18 percent of its global work force, reflecting a big slump in sales of its high-end computer servers.

And mortgage giant Freddie Mac said it planned for an initial injection of $13.8 billion of the $200 billion the government set aside to support it and Fannie Mae. Both were seized by the government in September. Freddie Mac posted a loss of $25.3 billion for the third quarter and said it expected to receive the government support by Nov. 29.

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