AT RETAIL
Spending sputters
When the Federal Reserve lowers interest rates to a rock-bottom 1.25 percent, as policy-makers did last week, it is supposed to set off a buying frenzy for everything from hand-held computers to sport-utility vehicles to stocks and bonds.
It isn’t always that simple, unfortunately. And if Americans turn up their noses at a the idea of a spending spree for the holidays, economists are wondering whether the Fed has run out of ammunition.
Skeptics note that consumers are struggling to dig out of record stacks of debt at a time when personal bankruptcies are on the rise and job growth has stalled.
That brings us to Thursday’s report of October retail sales. Economist Paul Ferley is looking for slippage of 0.3 percent to 0.5 percent, nothing like the stunning 1.2 percent drop that took place in September.
“Much of this latest decline reflects weak auto sales,” he said. “It appears that, in spite of [continued] zero-percent financing and other incentives, the carmakers are suffering a payback for having borrowed sales from future months earlier in the year.”
But Ferley, of Chicago’s Harris Bank and its parent, Bank of Montreal, said there is nothing on the horizon to suggest holiday sales of either cars or merchandise will be disastrous. For one thing, he said, soaring productivity is creating bigger paychecks for workers.
“Consumer confidence is improving, because the stock market has made a nice recovery,” he said. “And while some store managers will be forced into making a few markdowns ahead of Christmas, the holiday-spending period should turn out to be about average, with modest growth.”
PRODUCER PRICES
Slight increase
To some economists, the Fed’s drastic lowering of rates is evidence that the fight against inflation has become the caboose on the central bank’s train. They worry that, in short order, commodities will start to show a price spike, with investors squirreling away gold in a bet that inflation will return.
An immediate uptick in commodity prices is likely to show up in Friday’s report of the October producer price index. Analysts are calling for a rise of 0.2 percent, after a 0.1 percent gain in September.
That’s hardly scary. Even so, inflation hawks remain quite critical of current low interest rates, noting that they are at levels not seen in 44 years.
But economist Ian Shepherdson says, “With inflation back at the levels of the late ’50s, there is no reason that interest rates shouldn’t be there, too.”
Shepherdson, of High Frequency Economics in Valhalla, N.Y., added, “Low rates do not necessarily signal impending deflation.” He is looking for the economy to begin expanding early in the new year.
INDUSTRIAL PRODUCTION
Factories quiet
Concerns over the manufacturing sector were cited as a direct reason for the Fed’s easing of rates. Watch for Friday’s report on October industrial production and capacity utilization, as well as the month’s business inventories, to offer few signs that the nation’s factories are humming again.
Recent reports have shown factories operating at only about 76 percent of capacity, perhaps a shade less.
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The industrial slowdown is a global phenomenon, even hitting factories in Mexico. Recent reports have indicated that some producers south of the border are shifting work to China to cut labor costs.
EQUITIES
Will Santa visit?
Many banks, government offices, the Treasury bond market and some businesses will be closed Monday for Veterans Day, but the stock market will be open. The weekly auction of short-term government debt will take place Tuesday.
Meanwhile, investors continue to weigh the likelihood of a year-end rally on Wall Street. The current upsurge began about a month ago, and has seen major averages jump higher by about 20 percent. That’s about the same as the rally that flamed out in August.
The question at hand: Does the rally have enough staying power to welcome Santa Claus?