Economic Fears Sharpened: Disappointing Retail, Industrial Numbers Called More Warning Signs of an Approaching Recession

By James P. Miller, Chicago Tribune

Sep. 15–TWO REPORTS RELEASED SEPARATELY FRIDAY — one a measure of consumer spending and the other a snapshot of the industrial sector — offered additional evidence that the U.S. economy is beginning to falter.

The retail-sales and industrial-production data, while softer than expected, were far from disastrous. But the reports, which were released on the eve of a policy meeting on a key Federal Reserve interest rate, added more fuel to widespread expectations that Fed officials on Tuesday will seek to give the flagging economy a boost by lowering short-term interest rates.

The Commerce Department said that retail sales increased 0.3 percent in August, a performance that fell far short of the 0.5-0.6 percent upturn experts had been expecting. What’s more, a number of observers pointed out, excluding volatile transient factors, consumer purchases were even weaker than the overall figure indicated.

The 0.3 percent gain over last month’s sales was driven by a hefty 2.8 percent jump in auto sales, and that upturn was largely spurred by carmakers’ end-of-the-model-year price promotions.

Retail sales excluding autos actually declined 0.4 percent, the government said.

Sales dropped at building-material stores, for example, reflecting the housing industry’s troubles. And sales at gasoline stations also declined, reflecting a welcome (if fleeting) drop in consumer fuel costs.

But sales of some other products, including furniture and electronic appliances, strengthened in August.

At bottom, the “soft” retail data, said Moody’s Economy.com economist Scott Hoyt, seem to indicate that “consumers continue to grow their spending, but at a very modest pace.”

“Clearly,” he said, “the woes in housing, mortgage and financial markets are taking a toll on spending.”

While Hoyt maintained that the retail report offered little evidence to suggest U.S. households were growing more tight-fisted in August, other economists took a slightly darker view.

“Consumers have certainly become more frugal,” in response to the weaker housing market and higher costs for food and energy, observed Wachovia economist Mark Vitner. Retail sales, he said, had demonstrated “more fizzle than pop” in August.

The unexpectedly weak August data, while disappointing, were “not a disaster,” echoed High Frequency Economics economist Ian Shepherdson.

“What matters now is the extent of any fall rebound,” he said. But with consumer confidence dropping and the housing sector’s collapse weighing ever more heavily on Americans, Shepherdson continued, “we expect a clearly slowing trend” in retail sales.

A gloomier report came from the Federal Reserve’s data-collection group, which said Friday that industrial production rose 0.2 percent last month, falling short of the 0.3 percent upturn most economists had been expecting.

The report measures output from the nation’s mines, factories and utilities. In August, unusually hot weather spurred a big but not particularly meaningful 5.3 percent increase in utility production.

Mining activity slipped 0.6 percent, however. And output from the nation’s manufacturers — by far the biggest segment in the index — slipped by 0.3 percent, recording its first decline after five consecutive monthly increases.

The decrease in manufacturing reflects a drop in automobile production and, excluding autos, manufacturing slid a more modest 0.1 percent. Still, the pullback in the reading, which included softening production of consumer goods and business equipment, “could be an early warning sign for the U.S. economy,” said BMO Capital Markets economist Sal Guatieri.

The U.S. economy began to lose momentum more than a year ago, as higher interest rates finally sent the once white-hot housing sector into a decline. But despite calls from some quarters for the stimulation of a rate cut, the Fed has, until very recently, been disinclined to reduce interest rates. That began to change in August, when a rising number of consumer defaults on risky home loans known as subprime mortgages began to ripple outward and do damage in credit markets around the globe.

A week ago, a surprisingly weak jobs report jarred the financial community by raising the possibility that the economy might be poised to fall into an outright recession. Since then, investors have become hyper-focused on economic reports such as the two released Friday in search of evidence that the credit-market problems are causing a contraction in real-world activities such as clothes purchasing.

“A lower federal funds [interest] rate appears very likely” at the coming Fed meeting, Northern Trust economist Asha Bangalore said in a report issued Friday afternoon.

“The soft readings of retail sales and the drop in factory output, which probably do not reflect the impact of the current crisis entirely, are important indications that the economy was already slowing before the financial turmoil hit the global economy,” she said.

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jpmiller@tribune.com

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