The new number reflects consumers' unease with a slumping economy, shrinking nest eggs and falling home values. The October sales figure also surpasses the old mark of a 2.65 percent drop in November 2001 after the terrorist attacks on the U.S.
The drop was due primarily to cuts in auto sales. The auto industry saw a drop of nearly 6 percent, the biggest since August 2005 and auto companies saw unit sales fall to the lowest levels in 17 years. But sales of all kinds, from furniture to clothing, also saw plunges in purchases, causing October to be the fourth consecutive monthly decline in retail sales.
Excluding auto sales, retail sales fell by over 2 percent, also a record decline. While specialty clothing store sales were down nearly 2 percent, larger general merchandise stores including Wal-Mart also saw sales drops 0.4 percent.
Reacting to the Commerce Department's retail report and the still-volatile stock market, Federal Reserve Chairman Ben Bernanke pledged Friday to work to help fix the global financial problems and left open the possibility of new rate cuts to help the flailing U.S. economy.
While the Fed's key rate is now at 1 percent, the continuing clogs in the flow of credit between the U.S. and overseas may force the Fed to lower interest rates further on Dec. 16 at its final regularly scheduled meeting this year.
"The continuing volatility of markets and recent indicators of economic performance confirms that challenges remain," Bernanke said in prepared remarks to a central banking conference in Frankfurt, Germany. "For this reason, policymakers will remain in close contact, monitor developments closely and stand ready to take additional steps should conditions warrant."
Bernanke made his remarks as President George Bush and other world leaders descend on Washington this weekend for a summit meant to explore options for economic relief and to craft a global plan to boost the housing and credit markets by easing the credit crunch.
On Wall Street, markets indicated Friday that they might give back some of the gains made a day before, but they showed little response to the latest retail numbers revealing that consumers are hunkering down financially. The Dow Jones industrial average surged up 553 points on Thursday, after briefly flirting with the lows from last month.
One of the few retail areas that showed an increase in spending was restaurants and bars, which posted small gains of 0.3 percent, reflecting the desire of some consumers to seek solace as they try to ride out the economic rollercoaster.