Falling energy, wholesale prices point to possible recovery
By Leigh Strope
Associated Press
WASHINGTON — Falling energy prices, lower interest rates and tax rebate checks are expected to lift the economy in the second half of the year.
Economists said a new report yesterday showing the biggest drop in wholesale prices in more than two years, led by falling energy costs, has helped renew their rebound hopes.
"There is reason to be optimistic about the economy's prospects," said Ken Mayland, chief economist at ClearView Economics in Cleveland.
Record declines in June in residential electricity and natural gas prices and a big drop in gasoline costs fueled the 0.4 percent decrease in the Labor Department's producer price index, which measures price pressures before they reach the consumer. It was the best performance on wholesale inflation in 28 months.
On Wall Street, stocks held on to Thursday's big gains. The Dow Jones industrial average closed up 60 points at 10,539 and the Nasdaq index was up 9 points to 2,085.
The White House took credit for the improved economic outlook, citing the tax refund checks some taxpayers will start getting next week as part of President Bush's $1.35 trillion tax cut package.
"There is plenty of private-sector credible evidence that the tax cut will bring the economy back," said White House spokesman Ari Fleischer.
Economic growth has slowed dramatically since last summer. Analysts expect that growth in the just completed April-June quarter will come in at a weak annual rate of 0.5 percent — even worse than the 1.2 percent growth for the first three months of the year.
But economists think consumers will keep the economy out of a full-blown recession by increasing spending in coming months, reflecting the tax cut passed by Congress and lower interest rates.
"The tax cut will be arriving just in the nick of time," said Bruce Steinberg, chief economist with Merrill Lynch.
A surge in job losses hasn't made consumers totally close their wallets. A second report yesterday showed that retail sales rose 0.2 percent in June, pushed up by a strong 1.5 percent surge in sales of new cars.
Restaurants and electronic, drug, appliance and general merchandise stores also posted good gains. But sales were weak at apparel, sporting goods and grocery stores. Service station store sales fell sharply with the drop in gasoline prices.
Motorists this summer have been getting a break at the gas pump after world crude oil prices eased and refiners rushed to fill shortages that developed during the spring.
Economists had predicted that energy prices would retreat following a sharp run-up last winter caused by a shortage of supplies.
Wholesale energy costs plunged 2.5 percent, the biggest one-month decline since a 3.5 percent drop in April 2000. Gasoline prices fell by 3.7 percent, the biggest drop since last August. Also, record drops were posted in residential energy costs at 1.5 percent and natural gas prices at 5.8 percent.
Analysts said the good news on inflation could make way for more interest rate cuts. The Federal Reserve already has cut interest rates six times so far this year. The Fed's next meeting is Aug. 20.
The drop in wholesale prices left inflation at this level rising at an annual rate of 2.4 percent through the first six months of this year, far better than last year's 3.6 percent.
The news was just as good when volatile energy and food prices were excluded. The so-called core rate of inflation edged up just 0.1 percent in June, even better than the small 0.2 percent increases in April and May. So far this year, the core rate of inflation at the wholesale level is rising at an annual rate of just 1.6 percent.
