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For many, frugality set in even before Katrina hit

Retail sales are down, and surveys indicate the belt-tightening began several weeks before the storm hit.

By MARK ALBRIGHT
Published September 15, 2005

Weeks before Hurricane Katrina sent gas prices to $3 a gallon, Marcie Vaughn had resolved to drive less on errands, dine at fewer sit-down restaurants and confine more of her family's entertainment to their Gulfport home.

"Some of it was my husband starting law school, but mostly it was the rising cost of gas and other prices," said the 30-year-old mother of three who works as an interpreter for the deaf. "We decided to start economizing. I don't see it letting up any time soon."

Vaughn has plenty of company. Evidence is piling up that customers began turning more frugal because of a weakening economy weeks before Katrina ripped through the heart of the Gulf Coast oil industry.

On Wednesday, the Commerce Department said retail sales declined to $350-billion in August, down 2.3 percent from July. The performance was worse than forecasters expected and the deepest month-to-month decline in four years, dating to post-9/11.

This time, most of the difference came from a $10-billion plunge in auto sales after two months of widespread "employee discount" offers to clear lots. Compared to a weak August 2004, retail sales were up 7.9 percent last month. But most of that increase was fed by a 29 percent increase in sales at gas stations. Without the higher gas prices, August retail spending would have slumped 2.8 percent compared to the same month in 2004.

Worse, consumer spending continues to weaken after the hurricane. The International Council of Shopping Centers retail sales index, which is based on the nation's 77 biggest retail chains, was down 0.2 percent for the week ended Sept.10.

"The lingering effect of the hurricane and the record high gasoline prices are likely to cap the year-over-year pace of spending to between 3 percent and 3.5 percent," said Michael Niemira, chief economist for the trade group.

At the National Retail Federation, officials said the August numbers could have been worse. But the strength of a few retail sectors such as college back-to-school spending were encouraging.

"Retailers who were anxious about the upcoming holiday season may be breathing a little easier," said Rosalind Wells, the federation's chief economist.

Over the long haul, economists say the economy should recover from the shock of Katrina next year when the recovery and rebuilding is in full swing.

But they worry that consumer confidence will be jolted by a wave of Katrina-related layoffs and a bigger share of their income shifting to pay higher energy costs rather than other stuff. Consumer spending is about two-thirds of the economy.

Economists estimate the hurricane, which is forecast by the Congressional Budget Office to reduce employment by 400,000 jobs this year, will trim a full percentage point off economic growth as consumers cut back on spending.

Meanwhile, surveys of 39,000 consumers taken by ACNielsen in July found that Americans began changing their buying habits in subtle ways well before Katrina hit at the tail end of August. The results were skewed by income with the less affluent tightening their belts the most.

Most household decision-makers (61 percent) were trying to cut their driving by combining trips for errands, 31 percent were eating out less and 30 percent were entertaining themselves at home more.

Other significant budget exercises include clipping coupons more (20 percent), buying less expensive store brands at grocery stores (17 percent), switching to cheaper gas stations (30 percent) and choosing a lower grade of gas (16 percent). Fewer than one in five households (19 percent) said they had done nothing to reduce spending or change their driving habits.

"With the added disaster in New Orleans and other parts of the Gulf Coast, you can be sure that there are even more people now looking for ways to conserve fuel and reduce overall spending," said Todd Hale, ACNielsen senior vice president of consumer insights.

Some retailing executive noticed the changes in behavior, but see opportunities in them.

Lee Scott, president and chief executive officer of Wal-Mart Stores Inc., the nation's biggest retailer, said his customers are shifting to less expensive store brands and buying in smaller quantities.

"Instead of the 48- to 96-slice cheese packs, now we're selling more 16- or eight-slice packages in some stores, but anything that's new and unique, such as a laundry detergent or satellite radio, we're seeing exceptional sales," Scott told the Dallas Morning News .

"What that tells me is people are concerned and don't have as much money as they used to have," he said. "But unemployment is low and people are interested in what's new and fashionable - what helps them offset some of the conflicts they feel."

--Mark Albright can be reached at albright@sptimes.com or 727 893-8252.

[Last modified September 15, 2005, 01:04:09]