- The Washington Times - Thursday, May 10, 2007

Rising gasoline prices took a toll on the economy last month, cutting deeply into retail sales and sending the trade deficit soaring, reports showed yesterday.

The sobering economic news, including a rare 3.5 percent drop in sales at Wal-Mart stores open at least a year, caused a plunge in the stock market, where investors had been counting on consumers to keep the economy afloat.

The Dow Jones Industrial Average fell 148 points to 13,215 after attaining a string of record highs on hopes that strong overseas growth, exports and buoyant consumers would pull the U.S. economy through a soft spell.

Robust growth in exports has helped the economy, and a report from the Commerce Department yesterday showed they continued to post double-digit gains during the first quarter. But an even bigger jump in the nation’s bill for oil and gasoline imports to $25 billion overwhelmed the 10 percent improvement in manufactured exports and lifted the trade deficit 10.4 percent to $64 billion during March.

Meanwhile, the arrival of $3 gas in the spring put a wet blanket on low- and middle-income consumers who shop at Wal-Mart, Target, J.C. Penney and other chain stores, which reported dismal sales during April. A record 2.4 percent drop in “same-store sales” — those at stores open at least a year — reported by the International Council of Shopping Centers also was partly the result of cool weather and an early Easter selling season in March.

“Economic news seems to be telling us that the party is over,” said Don Schreiber, president of WBI Investments. “Consumers are battling higher interest rates on adjustable rate mortgages at a time when it’s tougher to refinance because of tighter credit and falling equity values. Energy and gas prices are soaring further, adding to consumers’ woes.”

The yearlong troubles in the housing market are dampening consumers’ moods, curtailing home-related spending, and pinching consumers’ wherewithal to finance purchases with cash-out home refinancings. J.C. Penney and several other major retailers said weakness in home furnishings have been depressing their sales.

“With housing continuing to falter,” Mr. Schreiber said, “it might just be enough to get consumers to rethink their addiction to continuing their decadelong spending spree.”

He said he thinks the stock market will hold up despite the consumer slump.

“The good news is that stocks are relatively cheap with a 16 price-to-earnings multiple. We haven’t seen it this low since 1995,” he said. “Earnings still look strong and may continue their double-digit growth again this quarter. Employment is strong and wages are up.”

Consumers, who rarely flag in the United States, account for about 70 percent of economic activity and have been the mainstay of the economy since the 2001 recession. It was not clear yesterday whether the “ugly” decline in same-store sales — the largest since the shopping council started keeping records in 1970 — was an aberration or the beginning of a trend, said Michael Niemira, the group’s chief economist.

While the council and individual retailers had expected a “small dip” in April sales, he said, the drop far exceeded expectations, with many blaming gas prices and the housing slump.

“The unprecedented demise of the housing market no doubt is helping curb the consumer,” and was behind the unexpected April drop, said Daniel C. North, chief economist at Euler Hermes ACI, a business insurance and credit provider.

The one area where consumers did not let up spending last month was gasoline. Their robust demand for the transportation fuel, despite prices approaching a record, reignited the trade deficit at a time when many analysts have been hoping for a turnaround in the deficit prompted by rising exports and a weak dollar, which makes exports cheaper and imports more expensive.

Peter Morici, business professor at the University of Maryland, said “dysfunctional energy policies” are fueling the petroleum deficit, along with lopsided trade policies that allow enormous deficits with China, Japan and other Asian countries to keep burgeoning.

“Petroleum, China and automotive products account for about 81 percent of the trade deficit, and no solution is possible without addressing issues particular to these segments,” he said.

While a realignment of currencies would help to reduce the deficits with China and Japan, only a major effort to improve fuel efficiency would make a dent in the oil deficit, he said, something that Congress and the administration have started to contemplate only this year. The Senate Commerce Committee this week approved a bill raising the average fuel economy nationwide from 25 miles per gallon to 35 miles by 2020.

“Persistent U.S. trade deficits are a substantial drag on growth” because they drain consumer dollars away from the U.S. economy, Mr. Morici noted. “The trade deficits of the last two decades have reduced U.S. growth by one percentage point a year” and have subtracted $1.5 trillion from U.S. output, or about $10,000 per worker, he said.

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