Consumers hold tight to wallets

The American consumer is scared stiff.

New economic data show consumers were not tempted last month 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.

Wall Street appeared to shrug off the bad news Wednesday.

The Dow Jones industrial average rose 2.9 percent to 8,727, the first close above 8,500 in nearly two weeks.

The Standard & Poor's index increased 3.5 percent and the Nasdaq closed 4.6 percent higher.

In Washington, D.C., however, the spending data added to the sense of urgency surrounding the Federal Reserve's new $800 billion plan to spur consumer spending by helping to lower mortgage rates and ease 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 that financing "essentially came to a halt in October," Treasury Secretary Henry Paulson said Tuesday, 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 said Wednesday, the largest decline since the Sept. 11 attacks.

Taking inflation into account, it dropped 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.

"If you're interested in a vehicle and all of a sudden you realize they'll only finance 50 percent or want a bigger down payment — that is enough to discourage people," said Brian Bethune, an economist with IHS Global Insight.

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 Monday 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 16.6 percent compared with last year, according to the Standard & Poor's/Case-Shiller home-price index released Wednesday.

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 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 getting credit, orders for washing machines, refrigerators and other big-ticket items fell in October by a bigger-than-expected margin of 6.2 percent.

Consumer spending is likely to be further hampered by rising unemployment.

While the number of people applying for the first time for unemployment benefits dipped slightly to 529,000 last week, according to the Labor Department, a four-week average of initial jobless claims rose to 518,000, its highest level since January 1983.

Unemployment is likely to rise for some time, Morici said.

"We're in a deep slide," he said. "This is what a bad recession looks like."