Store sales flat, productivity slows

By Alister Bull

WASHINGTON (Reuters) – U.S. chain store sales were flat
last week in an early sign of how Hurricane Katrina has hit the
economy, while second-quarter productivity was revised to a
slower pace, separate reports showed on Wednesday.

U.S. government Treasury bond prices dipped on the news of
weaker output and higher unit labor costs, which could fuel
inflation and persuade the Federal Reserve to stick with its
campaign of hiking interest rates despite Katrina’s harm.

Analysts expect national growth to suffer for a short while
from the devastation from the hurricane, which ravaged the Gulf
coast and sent gasoline prices soaring.

In early evidence of how consumers are reacting since the
storm hit, chain store sales were flat in the week to September
3 after dipping 0.3 percent in the prior week, the
International Council of Shopping Centers and UBS said in a
joint report.

Compared with the same week a year ago, sales were up 3.8
percent following a 3.9 percent increase a week earlier.

“The results for this past week reflect the fallout of
Hurricane Katrina as national sales were held back by about one
percentage point as stores were closed in the path of the
hurricane,” said Michael Niemira, ICSC’s chief economist and
director of research.

But financial markets paid closer attention to the downward
revision to productivity growth in the second quarter. Growth
in output per worker hour slowed to a 1.8 percent annual rate,
down from the 2.2 percent pace initially reported and the first
quarter’s 3.2 percent growth.

Unit labor costs — a key gauge of inflation and profit
pressure — grew at a 2.5 percent pace versus a 1.3 percent
rate initially reported and forecasts for a 1.4 percent gain.

“It’s not good. It’s a huge step back for the Fed. It’s not
the direction where the Fed wants to go. It’s unsettling,” said
Robert Brusca, chief economist at Fact and Opinion Economics.

Advances in unit labor costs focus attention on inflation
as the economy expands and are normally weighed closely by the
Federal Reserve.

At the moment, the U.S. central bank is more likely to be
preoccupied by the impact on inflation of soaring gasoline
prices after Hurricane Katrina.

But productivity gains effect how companies absorb rising
costs like energy, and slowing productivity may mean these
could take a bigger bite out of corporate profits.
Alternatively, if firms succeed in passing on higher costs to
customers, it could have implications for inflation that the
U.S. central bank will monitor.

The Fed said last month it expects to maintain the measured
pace of its more than year-long campaign of steady
quarter-percentage-point interest rate hikes. But since
Katrina, markets have bet it will pause after the next hike at
3.75 percent.

“Unit labor costs moving up is seen as fanning some of the
Fed’s concerns on inflation, but I doubt from the Fed’s
perspective that this changes their view very much,” said
Stephen Gallagher, U.S. chief economist for SG Corporate &
Investment Banking in New York.

“The Fed’s underlying intent is to raise rates and the
market needs to perhaps concede to that somewhat,” he said.

(Additional reporting by Oliver Ludwig in New York)