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Retail sales have record month

American consumers returned to auto showrooms and other stores in October, raising hopes that the economic downturn could be fairly short-lived.

Retail sales surged 7.1 percent to $306.8-billion, the largest month-to-month jump recorded under a measurement system used since 1992, the Commerce Department reported Wednesday.

The number was distorted by an unusual 26.4 percent increase in auto sales as consumers rushed to take advantage of no-interest financing offers from automakers. Excluding autos and gasoline sales, retail sales bounced back 1.8 percent in October after a 1.9 percent drop in September.

The report "is testimony to . . . the resilience of the U.S. consumer," said David Orr, chief economist at Wachovia Securities in Charlotte, N.C.

A consumer willing to spend is crucial for an economic turnaround. Consumer spending makes up two-thirds of the U.S. economy, so companies won't hire workers and step up production unless they think consumers are going to buy more.

The October retail sales report dispelled fears that consumers would go into a prolonged funk after the Sept. 11 terrorist attacks.

But a more traditional economic threat still casts a pall over the prospects for continued growth in consumer spending: rising joblessness as nervous companies trim work forces.

"Continued job losses will dampen consumers' confidence, income and spending right through the holiday season," predicted Bill Cheney, chief economist at John Hancock Financial Services Inc. in Boston. "Despite today's report, I simply can't see this being a merry holiday season for retailers."

The economy is seen shrinking at a 2 percent annual rate in the last three months of this year, according to a survey of 33 forecasters released Wednesday by the National Association for Business Economics. The gross domestic product, a broad measure of the economy, fell 0.4 percent in the July to October quarter.

The optimists see a recovery starting next spring. For that to happen, though, consumer spending will have to remain reasonably healthy. Barring any more terrorist incidents, that will depend largely on how people feel about their job prospects.

The unemployment rate jumped to 5.4 percent in October from 4.9 percent the previous month. However, new claims for unemployment benefits have fallen for two straight weeks to 450,000, and a University of Michigan survey of consumers indicated a slight uptick in confidence last week.

A report on this week's unemployment claims comes out today. If the number falls again, that could signal an improving trend, which might lead the Federal Reserve to back off an anticipated interest rate cut at its next meeting on Dec. 11.

Most analysts still predict a quarter percentage point cut in December in the Fed's key short-term federal funds rate to 1.75 percent.

The huge jump in auto sales is not expected to last. Several auto companies, worried about a slump after Sept. 11, introduced no-interest financing offers. Sales will likely fall off in the coming months, because the deals probably induced consumers to buy vehicles now instead of waiting until later.

Automakers have been selling out of inventory instead of boosting production to meet the higher demand, an indication that they believe the higher level of sales is a temporary phenomenon.

Nonetheless, the overwhelming response to the special offers surprised the automakers and shows that consumers are far from moribund, said Mustafa Mohatarem, chief economist at General Motors.

"We may have seen the bottom, barring any further incidents, on the consumer confidence side," he said at a U.S. Chamber of Commerce forum in Washington.

In areas other than automobiles, sales were up 6.6 percent at discount stores and 0.8 percent at clothing stores when compared with August levels, the month before the terrorist attacks. However, sales were down 2.6 percent at department stores and 1.2 percent at restaurants from August.

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