Bernanke: Plunging retail sales show recovery will take time

America's economic health won't snap back quickly, Federal Reserve Chairman Ben Bernanke said Wednesday, following a report that consumers cut their spending at the fastest pace in more than three years in September.

Retail sales fell 1.2% in September, marking the third consecutive month of declines in consumer spending, the Commerce Department said in a report which economists say is further evidence the USA is in recession. It was the biggest drop in consumer spending since August 2005, when Hurricane Katrina struck. Consumer spending accounts for more than two-thirds of all U.S. economic activity.

"The consumer shut up shop even before the markets got crushed and that is not good news for the economy," Joel Naroff, president of Naroff Economic Advisors, said in a note to clients.

In a separate report, the government said inflation at the wholesale level eased last month in the weakening economy.

In a speech to Economic Club of New York, Federal Reserve Chairman Ben Bernanke noted the dropoff in consumer spending and said the U.S. government, which announced Tuesday it would buy up to $250 billion in stock in banks and thrifts, now has the necessary tools to deal with historic stress in financial markets. But he cautioned that even if markets stabilize, "broader economic recovery will not happen right away."

The Fed chairman reiterated that the central bank will use all its powers to combat economic and financial stresses, but did not indicate whether another interest rate cut is in the cards when policymakers meet Oct. 28-29. The Fed last week cut a key interest rate to 1.5% from 2%, in concert with other central banks around the globe.

In a report out Wednesday afternoon, the Fed said the economy weakened in September across the nation, noting many business contacts had grown more pessimistic.

In its beige book report, an anecdotal look at the economy named for the color of the report's cover, the Fed said consumer spending, manufacturing and the job market had deteriorated while the housing market remained weak and credit was tight. Inflation moderated although prices in a number of sectors, such as energy, food and transportation remained high.

The retail sales report showed spending declines in September throughout the retail industry. Consumers cut their spending at car dealerships, restaurants and bars, and stores selling groceries, clothing, furniture, electronics and appliances, building materials and gardening equipment, and sporting goods, books and music. Internet sales also fell last month. Increases were seen only at gasoline stations and at health and personal care stores.

Such broad-based declines "could be a harbinger of real trouble this holiday season," Wachovia economist Anika Khan says.

A number of economists, including Peter Kretzmer of Bank of America, now estimate that consumer spending fell in the July-September period, the first quarterly drop in nearly 17 years, and will continue to drop in the months ahead. Consumers even kept increasing their spending during the 2001 recession.

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