Lower prices at stores making up for the rising cost of gas

By William Sluis
Chicago Tribune

Americans are getting accustomed to digging deep to fill a void of $50 or more each time the old bus needs a drink. The question is whether their efforts to fuel up the faithful gas-gulper are slaking their well-documented thirst for consumer goods.

But the Federal Reserve, determined to take pre-emptive steps against inflation, has ignored warnings that consumers might be pulling in their horns. Central bankers last week boosted short-term interest rates for the eighth time in 10 months.

Economists expect Thursday's report on April retail sales to show a gain of 0.5 percent, as activity at both department stores and auto dealerships picked up.

"April was a redeeming month for the economy, as employment and consumer spending showed signs of revival," said Chicago economist Diane Swonk.

Merchants, who needed to cut prices to clear out spring fashions and other goods, did some deep discounting, she said. Car sales, too, were heavily dependent on rebates and low-cost financing to keep vehicles moving.

"The message is that the economy is proving to be self-correcting, as consumers demand lower prices elsewhere to make up for what they are spending at the gas pump," said Swonk, of Mesirow Financial.

The good news, she added, is that thanks to the uptick in spending and payrolls, "talk of an economic soft patch is starting to recede."

The question is whether Fed chairman Alan Greenspan and company will push too hard in raising rates. That's what happened four years ago, when the central bank managed to deflate the Internet stock bubble, helping to tip the economy into recession.

Kenneth Skopec, a Chicago banker, says the Fed needs to make at least one or two more moves on rates before there is any concern about a slowdown. At this point, he says, the central bank shows no evidence that its money-tightening campaign is near an end.

"The Fed is nowhere close to overkill," said Skopec, of MB Financial Bank. "The question is whether policy-makers will need to continue to tighten credit six or nine months from now, at which point it might be time to worry."

The stock market has crawled forward for months, unable to gain much traction. Yet corporate profits show no signs of slowing.

Chicago investment manager William Hummer said first-quarter earnings grew 13 percent from a year earlier, and that profits will expand by about 10.3 percent this year.

"The worries about a slowdown in the economy seem to be evaporating," said Hummer, of Wayne Hummer Investments.

He said investors "have been in a mood that can best be described as very sour, but productivity gains are continuing and profits will continue to grow."

Hummer said recent reports indicate that the economy's expansion in the second quarter is exceeding the 3.1 percent rate in the year's first three months.