In a Surprise, Retail Sales See Biggest Drop in 16 Months

By PETER S. GREEN
New York Times
July 14, 2004

The United States economy hit a bump as retail sales fell an unexpected 1.1 percent last month, the Commerce Department reported today, apparently reflecting lower consumer confidence and higher energy prices. Economists said this could ease pressure on the Federal Reserve to raise interest rates.

The fall of 1.1 percent from May's figures reflects a decrease in spending at department stores and car and truck dealerships. Car and truck sales accounted for the largest part of the drop, falling 4.7 percent, and department stores fell 0.8 percent, as did restaurants.

Economists had generally expected overall retail sales to fall about 0.8 percent, according to a Bloomberg News survey.

"The question is whether it's just a pause for breath and we get back into action going into the third quarter or whether the slowdown is something more meaningful," said Ian Morris, chief United States economist for HSBC Securities USA, Inc., in New York.

Retail sales may seem like a dull statistic, but said Mr. Morris, "it makes up a large part of the consumer picture which makes up a large part of the country's GDP."

While spending and other indicators are up significantly from last year, Mr. Morris said, the economy could remain weak as long as energy prices remain high.

"If we get some relief there, he said, referring to energy prices, we may find the consumer pops his head out once again," he said. The fall in sales also leads some economists to predict that inflation is still under control, and that the Federal Reserve will not raise interest rates again soon. Rates were raised from 1.0 percent to 1.25 percent on June 30, but long-term Treasury bond yields have actually fallen since then, as market players appear to have determined inflation is under control.

"Consumer confidence and incomes are increasing, and inflation should be held in check," Ellen Beeson, an economist at Bank of Tokyo-Mitsubishi in New York, told Bloomberg News.

Some market watchers say focusing on the monthly figures is merely a distraction from the important picture. "Whatever the markets may do in the next six months or a year has no effect on the next 20 or 30 years," said Brian Mattes, a spokesman for the Vanguard Group, which manages $730 Billion in U.S. mutual fund assets. "More likely people will lose money if they move their portfolio in reaction to the news.

The weak spending also knocked some stuffing out of the dollar in trading on international markets today, falling to 1.2392 against the Euro at midday.

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