All eyes on economic update
By William Sluis
Chicago Tribune
While many Americans clip grocery coupons and live in fear of wage cuts or layoffs, many other consumers continue to fire up spending.
Low-priced manufactured goods, many of them imports, draw buyers into stores, while Detroit stokes auto dealer traffic with heavy incentives.
The question is how long consumers can keep up the spending pace, in light of business parsimony toward all purchases. Look for some answers Thursday, when the report on retail sales for April comes out.
Chicago economist Brian Wesbury is looking for a rise of 0.4 percent, or 0.5 percent when car sales are excluded.
"The war had an impact on spending, but once people walked away from their TV sets, they went back to the stores and started buying," said Wesbury, of Griffin, Kubik, Stephens & Thompson, an investment firm.
He said that while the economy is slowly improving, "it will take a number of months for it to return to a higher level of growth."
In the meantime, he said, there is at least a 50-50 chance the Federal Reserve will cut rates when policy-makers meet June 24-25. For now, he added, "every bit of data seen by members of the Fed will be hyperimportant."
For members of the central bank, the flavor of the day has been deflation. Fears about a general drop in prices, even though that possibility appears remote, have served as a call to arms among central bankers.
On Wednesday, the Fed will offer its "beige book," a region-by-region look at whether the tepid economy is beginning to build some steam. If there is more mention of plummeting prices, watch for added speculation that policy-makers will reduce interest rates when they gather.
Worth tabbing: Friday's producer price index for May. If it shows a drop anything like April's 1.7 percent shocker, interest rates notching lower will be a near-certainty.
Watch for Friday's report on the April trade deficit to renew concerns about the weakness of the dollar. The U.S. currency has suffered a hard fall, especially against the euro, and any additional bad news about the inflow of imports creates consternation.
Economist Sung Won Sohn, however, thinks the watchword for the dollar will be stability, at least for now.
"President Bush was given an earful about the dollar's drop when he met with European leaders a few days ago," said Sohn, of Wells Fargo & Co. in Minneapolis. "They expressed concern about the dollar falling 22 percent against the euro in a single year."
In less than two years, the U.S. currency has lost nearly one-third against the euro.
The Europeans emphasized for Bush that any further decline in the greenback creates a danger of a recession on the continent, according to Sohn, who said: "Any deflation in Europe — in effect creating another Japan — would be a terrible outcome for the world economy."
The dollar's depreciation is no panacea for our economy, because it won't necessarily cause imports to drop, Sohn said, so "the goal must be to keep currencies stable, even with the understandable concerns about a huge trade deficit."
The stock market is basking in a three-month rally that has pushed prices to their highest levels in nearly a year. That is making investors wonder whether a correction is overdue.
Chicago investment manager William Hummer, however, thinks that this time the rally is for real.
"Investors weren't prepared for the worst bear market in more than 60 years, but there are excellent reasons this rally should last into the summer," said Hummer, of Wayne Hummer Investments.
Not only are interest rates at a 45-year low, he said, but margins are improving, while tax rates are being reduced.
"That means corporate profits should grow at a double-digit rate during the second half of this year, with additional earnings improvement in 2004," Hummer said.
Technically, he said, a very important sign that prices are heading higher is the daily volumes of stock trading, which continue to expand.
