Posted on: Sunday, November 7, 2004

Rate hikes, gas prices may curb spending

By William Sluis
Chicago Tribune

As economists look ahead to 2005, they offer a disturbing forecast: Unless Americans can maintain an outsized level of spending, activity may begin to stall.

With interest rates at a 45-year low, borrowing was no big deal for consumers who saddled themselves with record debts. The savings rate fell to nearly zero.

However, with Federal Reserve policy-makers boosting interest rates three times since late June, the party may be about to turn less jolly. With more and more dollars being poured into fuel tanks, other outlays may suffer. Merchants are growing concerned ahead of the holidays.

The strength of consumer spending gets a fresh test Friday, with October retail sales. Chicago economist Brian Wesbury is looking for an unimpressive result, with sales for the month to be flat. He blames auto sales, which plummeted.

"Carmakers began reducing incentives, which has the effect of raising prices. If the Fed were to raise rates further, which seems very likely, zero-percent financing could soon be a thing of the past," said Wesbury, of Griffin, Kubik, Stephens & Thompson, an investment firm.

Buying in discount stores was tepid last month, he said, as consumers shifted their spending patterns in the direction of gas stations. Yet, overall spending remains at a high level.

"Looking back year-over-year, retail sales last month were about 7 percent higher than in October 2003," Wesbury said. "With the job market recovering, the economic recovery is self-sustaining. Consumers are doing their part."

Policy-makers of the Fed will gather Tuesday and Wednesday for a meeting of their Open Market Committee, amid widespread expectations that another rate hike is a certainty.

Chicago economist William Hummer says that "beyond a doubt, they will raise short-term rates by another quarter-point, to a flat 2 percent. Members of the Fed will take a further step to boost rates in December, Hummer said, bringing the rate at the end of this year to 2.25 percent.