Posted on: Sunday, September 12, 2004

Retail sales for month remain sluggish

By William Sluis
Chicago Tribune

During the long, not-so-hot days of summer, economists have been puzzling over what has happened to the American consumer. As sales in stores and auto dealerships began weakening, the experts first blamed cooler-than-normal weather, then a surge in the price of gasoline.

Others said consumers are overburdened by high housing costs, chained to a mighty mountain of mortgage debt.

In recent weeks, back-to-school sales, which are considered a sure-fire way to pull customers into stores, have been less than stellar. The question is whether the rapid approach of autumn will get people spending with their former gusto.

Economist Lynn Reaser expects Tuesday's report of August retail sales to show a tiny gain of 0.1 percent, following an advance of 0.7 percent a month earlier. When auto sales are excluded, August will show a gain of 0.2 percent, she said.

"Auto sales weakened last month after a big push propelled by incentives in July, while back-to-school sales came up somewhat short of expectations," said Reaser, of Banc of America Capital Markets in St. Louis.

A dip in gasoline prices helped boost sales elsewhere, she said, but discounters saw only small gains while stores catering to high-end buyers fared better.

Reaser's bottom line: "Consumer spending remains on a reasonable track, and there are expectations that holiday sales will be solid."

Only nine days remain before members of the Federal Open Market Committee gather to discuss interest rates, and economists are looking for additional action on monetary policy.

The Fed has boosted its benchmark federal funds rate, the interest that banks charge each other on overnight loans, from a 46-year low of 1 percent to 1.5 percent in the past three months.

Economist Scott Pedowitz says there is more than a 90 percent chance that central bankers will boost the rate by another quarter-point at the meeting Sept. 21.

"It also is quite likely that the Fed will raise the rate another quarter-point in November, bringing it to 2 percent, which has been an unofficial target for months," he said. "After that, members of the Fed will take time to re-evaluate."

Ahead of their meeting, central bankers will need to consider Thursday's report of the August consumer price index, said Pedowitz, of Commerzbank Securities in New York City. He expects it to show only a modest gain of 0.2 percent for the month.

"The biggest price drops we have seen are for cars and light trucks. Gasoline and food prices also have reversed," said Pedowitz. For those who fear inflation, however, he said it is noteworthy that despite a pause last month, raw materials prices have shown huge increases over the past 12 months.