U.S. Retail Sales Take Record Plunge

Retail sales plunged by the largest amount on record in October as the financial crisis and the slumping economy caused consumers to sharply cut back on their spending.

The Commerce Department said Friday that retail sales fell by 2.8 percent last month, surpassing the old mark of a 2.65 percent drop in November 2001 in the wake of the terrorist attacks that year.

The decline in sales was led by a huge drop in auto purchases, but retail industry analyst Bert Flickinger says shell-shocked consumers cut back on just about everything:

"Furniture, consumer electronics, apparel, sporting goods - every single category except for Internet sales were weak," Flickinger told CBS News.

The 2.8 percent drop marked the fourth consecutive monthly decline in retail sales and was much bigger than the 2 percent fall economists expected.

Already retailers are bracing for what they fear will be a poor holiday shopping season, said CBS News correspondent Alexis Christoforous.

The weakness was led by a 5.5 percent plunge in auto sales, the biggest drop since August 2005. Auto companies reported unit sales fell to the lowest level in 17 years as potential buyers, frightened by all the turmoil on Wall Street, stayed away from auto showrooms.

Excluding autos, retail sales fell by 2.2 percent, also a record decline, underscoring the widespread weakness last month.

Consumer spending accounts for two-thirds of total economic activity and weakness in this area was the major factor dragging down overall economic growth in the July-September quarter.

The gross domestic product fell 0.3 percent at an annual rate during the third quarter, the strongest signal yet that the country has fallen into a recession.

Many economists believe the GDP will drop by an even bigger amount in the current October-December period and will continue falling through the first two quarters of next year. They are expecting that the financial crisis, the worst in seven decades, will produce the country's worst recession since the 1981-1982 downturn.

At electronics giant Best Buy, executives are calling it the most difficult economic climate they've ever seen, with sales falling 7.6 percent in October, reports CBS News correspondent Sandra Hughes. They don't expect Christmas to be any better.

Despite these numbers, people are still coming into their stores - not to buy things but to look for work instead. Cassi Nay, operations manager at the retailer, said they've seen around a 20 percent increase in job applications in the past year. But they're just not hiring as many seasonal workers, reports Hughes.

The government reported last week that the unemployment rate shot up to 6.5 percent in October, and many economists believe it will top 8 percent before the economy starts to mount a sustained rebound.

The retail sales report showed that sales at general merchandise stores, the category that includes big chains such as Wal-Mart Stores Inc. and department stores, fell by 0.4 percent, while sales at specialty clothing stores were down a bigger 1.4 percent.

Sales at furniture stores dropped by 2.5 percent, with sales at appliance stores and sport goods stores also showing declines.

One of the few areas to show an increase was the category that includes restaurants and bars which posted a small 0.3 percent gain, perhaps reflecting the desire of some to seek solace during turbulent economic times.

And it wasn't only consumers exhibiting a lack of confidence.

Businesses cut back on their inventories by a larger-than-expected amount in September.

The Commerce Department said Friday that business inventories dropped by 0.2 percent in September. It was the first decline since March 2007 and the biggest drop in more than three years, since inventories fell by 0.3 percent in July 2005.

Economists had expected inventories would be unchanged in September. The big decline could be an indication that businesses are trying to cut back in the face of weakening consumer demand.

The 0.2 percent overall drop in inventories followed a 0.2 percent rise in August, and reflected a 0.7 percent cutback in inventories held by manufacturers and a 0.1 percent drop in wholesale inventories. Inventories held by retailers rose 0.2 percent in September.

Inventories are closely watched as signals of business confidence. When businesses are reducing their stockpiles because they are worried about future sales, it can further depress overall economic growth.