CHAIN STORE SALES
Buoyed by early Easter
The American consumer, ever tenacious, resembles the proverbial lobster in a stewpot, oblivious as the heat continues to rise. Gasoline prices have hit the stratosphere and the Federal Reserve has ignited a flame under the cauldron with its campaign of higher interest rates.
Yet the spend-happy consumer doesn’t seem to mind. Even pouring a $55 slug of fuel into the family SUV doesn’t seem to slow the trip to the checkout aisle when it’s time to stock up on paper towels.
Get ready for Thursday’s report of March discount and department store sales to show an advance of about 3 percent to 4 percent from a year earlier. That’s the prediction of Chicago economist Diane Swonk, who says the earliest Easter in about 20 years helped to overcome some of the negative fallout from soaring prices at the pump.
“Consumers remain surprisingly resilient, and there have been some upside surprises in sales at discount stores,” said Swonk, of Mesirow Financial.
She says Easter spending on clothing isn’t the huge factor it was several decades ago, partly because few consumers buy bonnets or other finery. But an early holiday means a jump on taking spring vacations, she said, and that boosts spending.
As for the Fed, Swonk believes consumers need more time to feel the effects of tightened credit.
“The central bank’s higher interest rates usually take 12 to 18 months to be fully felt,” she said. “So for now oil prices are having a bigger impact on spending than any moves taken by the Fed.”
FEDERAL RESERVE
Likely to stay the course
With little effect seen so far from higher rates, some economists are wondering whether the central bank should take further steps to tighten the money supply, or take a rest. Too much pressure might cause the economy to stumble. Concerns about the strength of the expansion grew on Friday, with news that the economy added only 110,000 jobs in March.
Don’t look for any signs the Fed will stop raising rates, however, when policymakers gather early next month, says Chicago economist William Hummer.
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“The hallmark of Fed Chairman Alan Greenspan is that he prides himself on consistency and predictability,” said Hummer, of Wayne Hummer Investments. “At this point, there is no reason for the Fed to deviate from its announced policy.”
Accordingly, the central bank will continue to boost rates at least until midyear, Hummer said, noting that the economy has made a remarkable comeback from the days when the Fed pulled its short-term rate to 1 percent, a 45-year low.
Since then, policymakers have pulled the trigger seven times in nine months, pushing the rate to 2.75 percent.
EQUITIES
Earnings are next hurdle
After treading water through the first three months of 2005, the stock market is awaiting first-quarter corporate profits. They will roll out in earnest over the next two weeks. Analysts are calling for them to show a gain of 8 percent from a year earlier, less than the 20 percent-plus gains that were common in mid-2004.
Chicago investment manager Marshall Front says warnings of disappointments have been relatively few. However, he added, investors are ignoring good news from General Electric, Intel, and other market bellwethers.
“As long as the Fed continues to boost short-term interest rates, investors are waiting for a sign that the tightening campaign is coming to an end,” said Front, of Front Barnett Associates.
He thinks the central bank may soon need to take a pause, “because policymakers want to weigh the effects of high energy prices and evidence that economies are slowing in Europe, Japan and Korea.”
However, such a respite, Front said, is unlikely to take place before short-term rates hit the 4 percent mark.
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