- The Washington Times - Wednesday, June 14, 2000

Americans pulled back on spending for the second month in a row in May, providing strong evidence that the robust economy is slowing in response to higher interest rates and a slumping stock market.
After falling by 0.6 percent in April, retail sales dropped by 0.3 in May to $266 billion as Americans cut back spending on the most interest-sensitive items: autos, home-building materials and furniture, the Commerce Department reported yesterday.
It was the first time that shoppers spent less for two months in a row since the stock market drop precipitated by the global economic crisis of August 1998.
"This is a significant sign of a slowing," said Don Hilber with Wells Fargo & Co. in Minneapolis, providing the most convincing evidence to date that consumers are spending at a more sustainable pace in the wake of the Federal Reserve's campaign to raise interest rates by nearly 2 percentage points in the last year.
Hopes that the Fed will refrain from raising rates at a June 28 meeting of its rate-raising committee and perhaps for the rest of the year sparked a rally on Wall Street yesterday. The hard-hit Nasdaq Composite Index gained a hefty 83 points to end at 3,851.
Analysts say the market's spring downturn helped precipitate the slowdown. While the Nasdaq has gained strength recently on hopes the Fed will stay on the sidelines, it remains far below its record high of over 5,000 set in March.
The markets yesterday took comfort that the decline in consumer spending was not big enough to seriously threaten business profits or economic growth.
Mr. Hilber noted that growth is only "downshifting" from peak levels attained at the beginning of the year. Consumers will be back, and may only be taking a breather, analysts said, since other reports show they remain highly confident about economic conditions and are bolstered by growing incomes and plentiful jobs.
Fed officials appeared to give their blessing to the economic news yesterday.
"Is a slowdown beginning to be visible?" asked the Fed's New York reserve bank president, William McDonough, at an appearance at the College of St. Rose in New York.
"A number of variables would tell you 'yes,' " he said, citing declines in the sales of homes, autos and other big-ticket items.
Mr. McDonough, who is vice chairman of the Fed's rate-setting committee, said the central bank wants to slow growth from rates at near 7 percent at the end of last year to a pace that can be sustained without igniting inflation a rate he estimated is around 4.5 percent.
"What the Fed is seeking to do is to reduce the level of demand somewhat," he said.
While most economists say growth most likely slowed in the second quarter close to the pace he suggested, Mr. McDonough said the Fed is still far from achieving its goal by another measure.
The voracious appetite of American consumers has driven up imports and the trade deficit to levels equal to about 4 percent of economic output. Mr. McDonough said he would like to see that deficit cut in half.
Fed Chairman Alan Greenspan also gave a speech yesterday. He did not comment directly on yesterday's report, but investors took has remarks extolling the virtues of today's technology-induced productivity surge as affirmation that he is pleased with the economy's performance.
"I think Fed is finished for the year," said Don Selkin, chief investment strategist at Joseph Gunnar in New York. He pointed out that the May economic figures don't show any response to the Fed's last rate increase of a half-percentage point on May 16, which sent rates to their highest level since 1991.
That and other more recent rate increases will slow the economy even further from last month's levels, so "the Fed really won't be able to justify raising rates any higher," he said.
Other traders cautioned, however, that a consumer price report due out this morning will reveal key information about inflation trends that the Fed will want to see before deciding what to do.
It would be "foolish" to "declare victory" over inflation, Mr. McDonough said. "There is no question that the U.S. economy, especially in relation to the world economy, is beginning to exhibit signs of imbalance and strain."
To some extent, consumers simply may be exhausted after going on a spending binge that broke all kinds of records last year, economists said.
Asha Bangalore, economist with Northern Trust Co. in Chicago, said the consumer retrenchment that started in March was dramatic. Spending dropped by half from a 7.5 percent pace at the beginning of the year to about 3.8 percent in the spring, she said.
"That's a lot. It's the impact of the rate increases," she said.
Sales of new cars tumbled for a third month, dropping by 1.3 percent in May, by 1.2 percent in April and 1.9 percent in March, the Commerce report said. Sales of building materials fell 1.6 percent after a 3.8 percent plunge in April.
By contrast, sales of quickly consumed items from food to prescription drugs were up slightly by 0.2 percent in May after a 0.1 percent decline in April. Sales at department stores held up despite the downturn, jumping 1.2 percent after a 0.3 percent gain in April.

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