Spending rose little in May

Associated Press

WASHINGTON — Consumers, who spent with abandon in April, put away their pocketbooks last month as economic activity remained weak in most parts of the country.

Taken together, the new reports depicted an economy that is still flirting with recession and in need of interest rate relief from the Federal Reserve, analysts said.

Federal Reserve Vice Chairman Roger Ferguson told Congress yesterday that he believed the country was still "in a period when the economy is growing quite slowly."

He said the continued "downside risk" was that news of rising job layoffs will mean that "consumers may decide they want to pull in their horns a bit," cutting back on spending.

Since consumer spending accounts for two-thirds of total economic activity, any big cutbacks could push the economy into a recession.

The tiny 0.1 percent increase in retail sales in May followed a revised 1.4 percent surge in April sales, the biggest increase since a 1.5 percent January advance.

Analysts said averaging the two months together showed a consumer sector that was continuing to spend at a solid pace, despite the sluggish economy, higher energy prices and rising job layoffs.

"There's nothing to suggest that consumers are crawling into their shells," said Bill Cheney, chief economist for John Hancock Financial Services in Boston. "The bottom line is the economy is holding steady even before we feel the full impact of the Fed's five rate cuts."

Many analysts believe the Fed will cut rates for a sixth time at the central bank's next meeting June 26-27.

Some suggested the rate reduction may be a smaller quarter-point move rather than the half-point cuts the Fed has undertaken starting in early January as it conducted its most aggressive credit easing campaign in nearly two decades in an effort to ward off a recession.

Treasury Under Secretary John Taylor said he believed growth in the current April-June quarter will come in around the weak 1.3 percent pace of the first quarter. But he predicted that the combination of the Fed's rate cuts and the stimulus provided by President Bush's tax cuts will see growth double to around 3 percent by early next year.

Taylor said the tax cuts will mean 100 million taxpayers will be receiving an average rebate check of $380, pumping $38 billion into the economy this year, starting in July.

"We feel that's very important for confidence and for keeping the growth rate strong going forward," Taylor told reporters in Paris.

The Fed's latest economic survey, compiled from information collected before June 4, showed that conditions remained soft with the rising unemployment rates dampening wage demands, helping to keep inflation moderate despite higher energy and health care costs.

Manufacturing activity slowed in all districts in May with widespread reports of falling demand for telecommunications equipment and scattered reports of falling orders at plants making furniture and computer chips.

The Fed report described tourism activity as "lackluster," with hotel occupancy rates down by 10 percentage points in Manhattan compared to a year ago, pushing the average room rate down by the biggest amount in eight years.

Atlanta, Chicago and Dallas all reported a slowdown in commercial air travel, with high fuel prices blamed for fewer trips to Hawaii, Las Vegas and tourist destinations in California.

For May, the retail sales report showed that spending was up at grocery stores and restaurants but weaker at clothing stores, general department stores and auto dealers.

Excluding a 0.7 percent drop in auto sales, overall retail sales would have been up by 0.3 percent.

Yesterday's monthly retail sales report was the first using a new system for classifying businesses — the North American Industry Classification System — that represents the government's effort to better measure the high-tech economy.