- The Washington Times - Friday, June 14, 2002

A big drop in retail sales last month is the latest sign that the economy is losing momentum, rather than gaining it as it usually does after a recession.
Because consumers have been the engine of the economic recovery, the unexpectedly large 0.9 percent drop in sales at department stores, gas stations, restaurants and other retail outlets reported by the Commerce Department yesterday prompted economists to ratchet down their estimates of growth for the year.
"It's a dramatically weak number," said Steven Ricchiuto, chief economist at ABN Amro Inc. "It certainly suggests gross-domestic-product growth will be weaker than we thought."
The sudden pullback in consumer spending adds to a list of developments casting a shadow over the recovery, which most economists believe started at the beginning of the year.
The stock market is not ringing in the recovery as it usually does, and major indexes are close to testing the lowest levels of the recession set after the September 11 terrorist attacks. Yesterday's sales report prompted a 115-point drop in the Dow Jones Industrial Average to 9,503.
The dollar and bond yields also are down, profits are weak, and business spending and hiring plans remain at recessionary levels. Federal Reserve Chairman Alan Greenspan and other economists say that must change if the recovery is to take hold and become permanent.
Some analysts blamed cool weather during May for keeping consumers from going to the malls. They note that last month's lull followed a robust 1.4 percent jump in retail sales in April.
"Now that the weather has improved considerably in June, retailers are reporting increased sales activity," said Rosalind Wells, chief economist at the National Retail Federation. She said cool weather was one reason for a 2.8 percent drop in clothing sales.
The overall fall in sales was mostly due to a 2.5 percent drop in auto sales as major automakers scaled back their zero-interest loan offers; a 3.1 percent drop in gasoline sales, reflecting a decline in the price of gas; and a 2.2 percent drop in sales at department stores.
"The unexpectedly sharp decline in consumer spending raises lots of questions," said Joel Naroff of Naroff Economic Advisers.
He noted that the spending pullback was broad-based, with healthy sales increases only at furniture outlets and electronics stores. That suggests that consumers, for now, are focusing on furnishing the record number of homes they bought last year.
"I just don't know what to make of this report. It was weak; there is no doubt about it. But some of the weakness seems way overdone," he said. "How much the consumer paused, we will have to wait and see."
Consumer spending has pulled back since the beginning of the year as the boost from tax refunds and lower tax-withholding rates waned. High debt loads also are weighing on consumers, particularly as a result of their auto-buying binge in the winter.
But some analysts say the stock market poses a bigger threat to growth than any backtracking by consumers.
The International Monetary Fund this week said the recent setback in the U.S. stock market poses the biggest obstacle to economic recovery around the world, because it reflects a loss of confidence and is hindering capital investment in the United States.
"Continued uncertainty associated with weak profits, accounting and corporate governance scandals, the threat of terrorism and global unrest are undermining investor confidence," said Jerry Jasinowski, president of the National Association of Manufacturers.
The sluggish improvement in profits is discouraging new business spending on plants and equipment, he said. Executives surveyed by the manufacturing group are optimistic, however, that business spending will pick up in the second half of the year and bolster the recovery.
Most economists remain optimistic that the recovery will build and start chugging along on all cylinders by the end of the year.
"The recent weakness in equity markets, which appears driven by the uncertainties surrounding the war on terrorism and the Enron debacle, is grossly out of line with economic fundamentals," said Diane Swonk, chief economist at Bank One Corp.
"Consumers remain alive and well but are not spending at quite the pace we saw in the first quarter," she said. And even business investment, particularly in equipment, appears to be coming back, perhaps reflecting recent upward revisions in profits, she said.

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