- The Washington Times - Friday, July 14, 2006

The fabled shoppers of America wavered in the face of rocketing energy prices in the spring, according to a report on retail sales released yesterday that sent markets swooning for a third straight day.

Sales at stores, restaurants, Internet retailers and other outlets stagnated in May and June, the Commerce Department reported. Soaring receipts at gas stations caused by rising prices offset sharp declines at auto dealerships, appliance retailers and building materials stores.

The 0.1 percent slip in sales coincided with a slide in consumer confidence and rise in unsold stocks at businesses. This suggests the economy sagged under the weight of energy costs even before this week’s string of record oil prices. Premium crude rose to a high of $77.03 in New York trading yesterday.

“Consumers are pulling back sharply,” said Peter Morici, University of Maryland business professor. “The combination of rising gasoline prices and interest rates is doing much to slow down growth and push up inflation.”

The report shows that the economic slowdown may have gone beyond the “soft landing” that the Federal Reserve sought this spring, he said. A report on import prices yesterday indicated that soaring costs of energy and other commodities are filtering to traditionally cheap imported goods, despite two years of Fed interest-rate increases intended to temper inflation.

The combination of weakening consumer spending and record oil prices caused another sell-off in the stock market yesterday, with the Dow Jones Industrial Average dropping 107 points to 10,739. The Dow has lost nearly 400 points in the past three days.

In another sign that consumers may be buckling under high energy prices and a financial market downturn, the University of Michigan reported that its Consumer Sentiment Index this month unexpectedly fell to 83 from last month’s level of 84.9.

“Given the unnerving developments in the Middle East, the prospects for $80 oil and record gasoline prices, a clearly deteriorating job market in the U.S. and the steady erosion in the stock market, it stands to reason that households will be much more cautious about spending in the future,” said Bernard Baumohl, executive director of the Economic Outlook Group, an economic advisory firm in Princeton, N.J.

The retail sales report was the clearest sign yet that consumers are reacting to high energy prices and the downturn in the housing market by slashing spending on big-ticket items, he said.

With momentum reversing in most sectors, it could take only a few more developments to tip the economy into a recession, he said, adding that those elements may be materializing overseas.

Strong U.S. exports and business spending this year had been expected to “keep the economy out of serious trouble” as consumer spending cooled, he said. “Now we’re starting to question how well those two sectors will hold up in this explosive geopolitical environment. The escalating violence in the Middle East and the persistent rise in global interest rates raises fresh questions whether the U.S. has suddenly become vulnerable to a much more serious downturn.”

Mr. Baumohl says he thinks the Fed will recognize escalating risks to the economy and will stop raising interest rates.

Other analysts disagree.

“That growth is easing is only one part of the decision,” said Joel Naroff, president of Naroff Economic Advisors. “Inflation is the other, and may still be the key element. My guess is that the inflation numbers will be too hot to handle.”

Mr. Naroff predicts that the Fed will raise its key rate by another quarter percentage point in August. Fed Chairman Ben S. Bernanke is scheduled to testify before Congress next week.

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