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Consumer spending drops record 2.8 percent

Even without plunging auto and gasoline sales, October's rate was still -0.5 percent – a gloomy sign for holiday shopping.

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Abandoning high-end retailers, a growing number of consumers are shopping at discount stores like this Wal-Mart in Clarence, N.Y.

David Duprey/AP

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With only two weeks to go before the holiday shopping season kicks off, consumers don't appear to be in the mood to spend.

Who can blame them?

Credit remains tight, job losses are spreading at an eye-opening rate, and home prices are continuing to fall. When consumers pick up the paper they read that the economy is in a recession. About the only bright spot is the price of gasoline, which continues to fall as consumers stay home and watch football games instead of heading to the mall.

Some economists expect the deepening consumer malaise to be one of the factors that pushes the Federal Reserve to drop interest rates next month after lowering short-term rates to 1 percent at the end of October. In a speech on Friday in Frankfurt, Germany, Fed Chairman Ben Bernanke indicated that the Fed would take additional steps if needed.

The latest indication of how tightly consumers have shut their wallets came on Friday when the Commerce Department reported that retail sales in October fell 2.8 percent. That's the biggest one-month drop since at least 1992, when the department changed the way it reports the numbers. The decline was led by a 5.5 percent drop in auto sales, as potential car buyers either could not get loans or just stayed away from showrooms.

"This is a bad precursor to the holiday season," says Bob Brusca of Fact and Opinion Economics in New York. "You have to be worried about demand collapsing in October ahead of the holiday season when the bulk of retail activity occurs."

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