- The Washington Times - Wednesday, May 14, 2003

A predicted bounce in the economy from a postwar rebound in consumer spending has failed to materialize.

Consumers cut back spending at retail stores by 0.1 percent last month, the Commerce Department reported yesterday, and sales outside auto dealerships plunged 0.9 percent in their worst performance since the September 11 terrorist attacks.

Even measures of consumer confidence, which surged with a military victory in Iraq, declined as the reality of a sluggish economy and continuing job losses re-emerged from the distractions of war.

“Retail and consumer spending are a function of one four-letter word: jobs,” said Kurt Barnard, president of Barnard’s Retail Consulting Group. “When jobs are scarce, Americans keep their hands in their pockets. People will buy what they need, but there won’t be many binges.”

Retail sales declined in April despite a solid 2.5 percent rise in auto sales brought on by deep discounting at dealerships. Spending fell broadly at clothing and department stores, home-improvement stores, restaurants and gas stations.

But the decline was exacerbated by cool weather and the 5.9 percent drop in gas sales, reflecting a plunge in oil prices as coalition troops secured Iraqi oil fields. The fall in oil prices also caused a record 2.7 percent drop in import prices last month.

The Commerce report disappointed Main Street and Wall Street because it showed consumer spending was not rebounding after posting one of its worst performances in a decade during the first quarter. Federal Reserve Chairman Alan Greenspan and most private economists had predicted a revival once the war ended.

With no evidence of a rebound, the Fed last week said the economy was threatened by fundamental weaknesses, including signs of deflation, and was not held back simply by anxieties of war.

The Fed said it was leaning toward another cut in interest rates, and economists said yesterday’s Commerce report made a move more likely.

“The unexpected fall in retail sales is a bit disconcerting. You cannot simply chalk it up to lower gasoline prices,” said Joel Naroff of Naroff Economic Advisors. “There were declines in demand for a number of goods other than gasoline, including clothing, building materials, food, and furniture.”

Rather than go out and celebrate the victory in Iraq, consumers cut back spending at restaurants by 0.5 percent. Even discount chain stores like Wal-Mart, which have prospered lately with a rise in the number of budget-conscious consumers, are reporting the most sluggish sales in more than a decade.

“The falloff in retail spending raises questions and puts us on warning that the forecasted consumer rebound may take a little more time,” said Mr. Naroff. He also said the scarcity of jobs might have a more lasting effect on consumers’ pocketbooks.

“If that is the case, the Fed will have one more thing to worry about,” he said.

Deb Johnson, analyst at Prudential Securities, called the drop in sales “discouraging” but said she saw glimmers of hope.

The plunge in gas prices means consumers have more money to spend elsewhere, she said.

Also, a drop in mortgage interest rates has spawned another major round of refinancings. The Mortgage Bankers Association reported a 20 percent jump in its refinancing index for last week.

Refinancings have been a key source of support for consumers since the 2001 recession, enabling homeowners to cut their debt payments and extract hundreds of billions of dollars in equity to spend on automobiles, remodeling and other products and services.

Consumers also have been stowing record amounts of cash in bank deposits.

“This should help offset some of the weakness in consumer spending due to the poor jobs market,” said Ms. Johnson.

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