American wallets tighten up in government shutdown

DETROIT/CHICAGO Wed Oct 16, 2013 5:38pm EDT

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DETROIT/CHICAGO (Reuters) - A deal over the U.S. budget crisis and government shutdown cannot come soon enough for many companies.

Some American consumers have put away their wallets, at least temporarily, avoiding purchases of big-ticket items like cars and recreational vehicles while Republican and Democratic Party lawmakers argue over fiscal policy.

"We're hearing so much more about the government shutdown now and it's not just a sentiment of being fed up, fear is really starting to set in," said Tammy Darvish, vice president of DARCARS Automotive Group, a family-run company that owns 21 auto dealerships in the greater Washington area.

Vehicle sales at the company are down as much as 15 percent so far this month compared with a 12 percent increase through the first nine months, she said. Consumers are also putting off non-critical car repairs in the service departments.

"We're sort of 'crises-ed' out," Darvish said. "Every time you turn around we're meeting another budget cutoff, but this time it's gone on a lot longer and people are very, very spooked."

On Wednesday, a last-ditch agreement in the U.S. Senate appeared to avoid a historic lapse in the government's borrowing authority and reopen partially shuttered federal agencies that have sidelined hundreds of thousands of workers for the past two weeks. Both the Senate and the U.S. House of Representatives were to vote later in the day on a measure for President Barack Obama to sign into law before Thursday's deadline.

Data released on Wednesday indicated that the Washington politics had affected economic growth and BlackRock Chief Executive Officer Laurence Fink said in an interview that CEOs were seeing "a slowdown from the American consumer ... and it's going to have an impact on job creation at a time when we need more job creation.

Standard & Poor's financial research firm said in a statement that the government shutdown had shaved at least 0.6 percent off of annualized fourth-quarter 2013 GDP growth, or taken $24 billion out of the economy.

The Federal Reserve on Wednesday said U.S. growth continued to chug along at a "modest to moderate pace" in September and early October, but the shutdown had increased uncertainty. The Boston Fed, for instance, cited concerns of companies in the region about the potential affect of the shutdown on consumer demand.

David Westcott, chairman of the National Automobile Dealers Association, said in Detroit that sales and showroom traffic at his North Carolina dealership were down in the last 40 days, but he was unsure how much of that was due to the shutdown.

In Greenfield, Indiana, the owner of Mt. Comfort RV sounded a similar refrain to Darvish at her car company in Washington.

"When they announced the shutdown, it was almost like someone turned a switch off," said Ken Eckstein, who sells everything from $5,000 folding campers to $500,000 motor homes. "All of a sudden instead of talking to 10 people a day, we're talking to two."

Up to two weeks ago, Eckstein said his business was having its best sales year since 2006. He said other RV dealers have noticed a similar dropoff, but he acknowledged he was not sure if the budget impasse was the only reason.

"Is it gas prices? Is it interest rates? Is it phases of the moon?" he asked. "There are still people coming through the door, but on a nice, 80 degree day in October there should have been more."

The fears and drain on consumer confidence brought on by the stalemate in Washington are not hitting every corner of retail, however.

Toy demand heading into the holiday season is very strong at Mattel Inc MAT.N, the world's largest toy company. Berkshire Hathaway Inc's (BRKa.N) Warren Buffett said he has not seen a drop off in consumer confidence at its home furnishing and jewelry retailers.

"If this goes past tomorrow, we will see," Buffett told CNBC. "It won't cause me to change what I do in life, but we will definitely see something."

Even that "something" may prove to be short lived. After shares of appliance maker Whirlpool Corp took a hit early this week over fears of softening demand in September, Longbow Research analyst David MacGregor said the decline looked temporary.

"The good news is that we know from historical experience that consumer confidence typically recovers very quickly once the perceived threat has passed," MacGregor said.

A spokeswoman for Whirlpool declined to comment on Wednesday.

PULL BACK IN POWER TOOLS, HOUSING

It was not just big-ticket items that remained in dealerships and stores over the past few weeks. Power tool maker Stanley Black & Decker Inc (SWK.N) on Wednesday cut its 2013 profit forecast partly because of the U.S. government spending cuts and shutdown. It also blamed slower-than-expected margin expansion in its security business.

The National Retail Federation said similar comments will be heard over and over across the country. The trade group, in a letter to congressional leaders, pointed to a Gallup poll showing consumer confidence now measures at the same low levels as during the recession that began in 2008.

In addition to hurting consumer confidence, the shutdown has had a more immediate impact on retailers, said NRF President Matthew Shay, citing a lack of economic data to concerns over processing of imported merchandise.

On Wednesday, the NRF said that on average 29 percent of consumers it polled believed the political gridlock over the U.S. budget would affect their holiday spending plans. In addition, eight of every 10 surveyed said they plan to spend less this year.

The housing market, another strong leg in the U.S. economic recovery, also appears to have taken a hit from the shutdown.

The National Association of Home Builders said on Wednesday that U.S. homebuilder sentiment slipped slightly in October on the policy gridlock and higher labor costs, while the Mortgage Bankers Association said mortgage applications for purchases dipped in the most recent week.

At Harley-Davidson Illinois, however, which operates four motorcycle dealerships around Chicago, bike shoppers did not appear to be unnerved.

"All four of the dealers have sales goals that were set before the shutdown," general manager Carole Ferguson said. "Some of us are right on target with those goals and a couple are a little off. But no one is reporting a drastic drop."

(Additional reporting by Dhanya Skariachan in New York; Editing by Edward Tobin and Grant McCool)

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