- The Washington Times - Friday, April 13, 2001

Consumer confidence fell to a seven-year low this month as new claims for unemployment benefits rose to a five-year high.

The problems put a damper on consumer spending and reawakened worries that the economy's weakness is spreading.

A raft of reports out yesterday showed the increasing gloom affecting America's consumers.

The rise in joblessness caused by layoffs at major corporations combined with the steady fall of the stock market to cut deeply into consumer optimism, as tracked by a University of Michigan consumer sentiment index released yesterday.

The cloudier outlook in turn prompted consumers to cut purchases at stores of all kinds by 0.2 percent last month, the Commerce Department reported. Major outlets such as Sears, Roebuck & Co., Federated Department Stores Inc. and the Limited Inc. were all hit. That led leading retailers to forecast a deteriorating outlook for sales this year.

"What really drives consumer spending is the labor market," said James W. Coons, chief economist at Huntington National Bank. "People are concerned about losing their jobs… . It caps a very disturbing trend that's been in place since last summer."

Retail sales dropped from an annual growth rate of more than 10 percent in early 2000 to less than 2 percent last month. The dramatic decline appears to track the fall of the stock market as well as a spike in energy prices that emerged a year ago and continues to hamper spending, said David Orr, chief economist with First Union bank.

In about the only good news for consumers out yesterday, the Labor Department reported a record drop in residential natural gas prices, which peaked at all-time highs in December in the thick of the winter-heating season.

But energy analysts say high prices may return next winter as supplies of natural gas remain scarce. And last month's lower prices did not come in time to help many low-income consumers who face gas shutoffs because they were unable to pay their huge winter gas bills.

Even with the increasing concerns weighing on consumers, spending continued to grow in the first quarter of the year, although more sluggishly, Mr. Orr said. But the declining trend in retail sales is "not pretty" and must reverse if the economy is to avoid recession, he said.

Like many economists, Mr. Orr said much depends on whether consumers continue to be buoyed by lingering strength in the job market.

"The jobless rate will decide whether [the pace of sales] heads to zero," he said. Unemployment increased sharply to 4.3 percent last month from 3.9 percent in October, but it remains at historically low levels that support spending.

Federal Reserve officials and some economists remained upbeat yesterday, despite the stall in consumer spending, which accounts for two-thirds of all economic activity and had been the economy's strong point amid a plunge in manufacturing and technology.

Thomas Hoenig, president of the Fed's Kansas City reserve bank, told business leaders in Omaha, Neb., that he was not particularly concerned about the one-month decline in retail sales. Those came after no sales growth in February and a large 1.3 percent jump in sales in January.

"The last couple of months the evidence has been mixed but there have been some signs of the economy stabilizing," he said, estimating that growth right now is at a "very reasonable" rate around 1 percent. He sees growth picking up to 2 percent and higher by the end of the year.

Mr. Hoenig and other Fed officials take comfort from signs that the recession in manufacturing may be bottoming. There is a prospect of production ramping up again as an overhang of inventories is cleared off retailers' shelves and out of auto dealer showrooms.

Diane Swonk, chief economist at Bank One in Chicago, said that production of cars and trucks is poised to rise at a double-digit rate in the spring quarter, adding more than 2 percentage points to the economic growth rate.

This "sharp reversal" from the auto-sales slump late last year will continue to drive growth for the rest of the year, she said, helping to lift consumers out of their funk.

"The capacity of U.S. consumers to spend remains positive," she said. Credit remains abundant and a surge in mortgage refinancing this year is putting more money in peoples' pockets, partly offsetting "the carnage on Wall Street," she added.

While some economists see a turnaround in manufacturing, National Association of Manufacturers President Jerry Jasinowski said producers continue to be pinched by falling prices and flagging sales here and abroad.

"The downturn in manufacturing will spill over into other sectors," he said, unless the Fed moves quickly to cut interest rates for a fourth time this year.

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