RETAIL SALES
Getting back on track
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Americans running to get to the shopping mall encountered a slippery slope leading from the oil patch in June, and things haven’t been the same since.
The problem: Gasoline prices ballooned above $2 a gallon, crimping budgets for buyers already struggling under record levels of credit card debt.
So instead of setting a steamy summertime pace in buying everything from barbecue grills to sport-utility vehicles, consumers scaled back.
Adding to the gloom: intermittent rain and cool weather, plus a hike in short-term interest rates by the Federal Reserve.
Whether the picture has begun to brighten will be evident Thursday, with a report on July retail sales. Chicago economist Brian Wesbury is looking for a solid rebound of 1.5 percent.
“Consumer spending continues to be strong, and fears about a slowdown appear to be overdone,” said Wesbury, of Griffin, Kubik, Stephens & Thompson, an investment firm.
Much of last month’s strength was in car buying, where unit sales soared by 15.5 percent, he said. Additionally, consumers paid more for gasoline last month, boosting the overall retail figures, he said.
On balance, Wesbury said, “it is fairly clear that despite weak job growth, retail sales are on the mend.”
FEDERAL RESERVE
`Measured’ rise likely
Ahead of the retail report, Federal Reserve policymakers will gather Tuesday to determine the course of interest rates. Based on recent comments from Chairman Alan Greenspan, most analysts expect a quarter-point rise in the central bank’s overnight lending barometer, currently at 1.25 percent.
Chicago economist William Hummer says Fed members are obligated to act.
“If Greenspan held back on a rate increase, it would make the economy look very weak and it would shock financial markets. He is not willing to take that chance,” said Hummer, of Wayne Hummer Investments.
Although some recent economic statistics have looked weak, Hummer says members of the Fed won’t react to short-term data. Meanwhile, he added, they have pledged to bring rates in line “through a series of measured steps.”
The only question, according to Hummer, is whether the central bankers will push rates higher by another quarter point when they meet in late September.
For his part, economist Wesbury says an unexpectedly weak July job market creates about a 30 percent chance that Fed members will do nothing when they gather Tuesday.
PRODUCER PRICES
Inflation picking up
One reason the Fed might act is that inflation has not been entirely tame, notably because of pressures from both food and energy. Year-over-year, economists say overall inflation is running at a 3 percent rate, or slightly more.
Analysts expect Friday’s report on the July producer price index to show a gain of 0.3 percent. The gauge, which measures inflation at the wholesale level, has been rising for months.
EQUITIES
Returns are `subdued’
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For the stock market, 2004 is becoming the year of no gains. Just about all measures of equity performance have been lower by about 4 percent.
Portfolio strategist Marc Borghans of LaSalle Bank says the market’s behavior is normal, considering last year’s hefty gains.
“An impressive burst higher through the first six months after a market bottom is typically followed by quite subdued returns in subsequent quarters,” he said in a letter to clients.
According to Borghans, “as the Fed makes money less easy, it may become tougher for investors to make easy money.”