WASHINGTON -- Retail sales barely inched higher in August and consumer prices were little changed, the government reported yesterday, findings that suggest the Federal Reserve won't push borrowing costs higher as the economy continues to expand with little inflation.
Stocks soared to record levels and Treasury bonds surged -- sending interest rates plummeting -- on the news that both retail sales and the consumer price index grew at slower-than-expected rates last month.
Economists said the reports put to rest the idea that the economy is overheating. "There's been a fairly profound slowdown," said David Resler, chief economist at Nomura Securities International in New York.
Retail sales rose 0.2 percent last month after edging up 0.1 percent in July, Commerce Department figures showed. Analysts were expecting a gain of 0.7 percent for August, but lower gasoline prices limited the effects of increased purchases of fall clothing and seasonal goods.
The consumer price index, meanwhile, which tracks prices Americans pay for goods and services, increased just 0.1 percent last month, the Labor Department said. That's down from a 0.3 percent rise in July and half of the August gain economists predicted.
Energy costs fell for the third consecutive month and clothing prices showed the largest monthly drop in almost half a century.
"If the Fed needed support to decide to leave rates unchanged, they got it today," said Hugh Johnson, chief investment officer at First Albany Bank in Albany, New York.
Treasury Secretary Robert E. Rubin steered clear of a Fed discussion in making his point about prices. "If you talk to businessmen as much as I do around the country, you don't see signs of reigniting inflation," he said.
Still, some analysts are sticking by predictions the Fed will raise the overnight bank-lending rate at least a quarter point at the Sept. 24 meeting of the Federal Open Market Committee. As evidence, some cite a surge in oil prices that mostly occurred after the August inflation report was compiled.
Just yesterday, the October crude oil future contract broke above $25 a barrel on the New York Mercantile Exchange for a time before falling back to close at $24.51 a barrel after the Clinton administration said it would consult with its allies before any further military strikes against Iraq.
Moreover, FOMC members "are still concerned about the wage issue," said Diane Swonk, deputy chief economist at First Chicago, NBD in Chicago.
Former Fed Governor Lyle Gramley, a consulting economist at BTC the Mortgage Bankers Association of America, said he wouldn't be surprised by a quarter-point Fed increase by the end of the year if the economy perks up.
A separate report yesterday from the Labor Department called into question, though, the notion that a wage surge is developing. Real weekly earnings rose 0.7 percent in August, following a 1.5 percent decline in July. Still, that left the index up only 0.7 percent for the last 12 months once inflation is factored out.
Investors found yesterday's mix of indicators to their liking. The benchmark 30-year Treasury bond soared almost a point and a half. That pushed down its yield almost 12 basis points to 6.95 percent in the biggest daily rally in more than a month. Stocks followed suit -- the Dow Jones industrial average soared 66.58 points to close at a record high of 5,838.52 -- even though the weaker-than-expected retail sales calls into question earnings expectations for many U.S. companies.
Retail sales were sluggish not only in August but also in July, said Nomura Securities economist Resler. Indeed, one closely watched retail sales measure -- factoring out autos and other vehicles -- rose only 0.2 percent last month, the same as in July.
"The wealth effects that helped contribute to a spurt of growth earlier in the year have dissipated" as the stock market leveled off and the proceeds of mortgage refinancings waned, said economist Joel Prakken, chairman at Macroeconomic Advisers LLC in St. Louis.
The picture isn't clear cut, however. Recent reports of a fall to a seven-year low in joblessness, climbing wages, and high consumer confidence levels suggest Americans still have lots of untapped spending power. Yesterday, for example, the University of Michigan reported that its preliminary September consumer sentiment index was at 95.0, down only slightly from the August reading of 95.3.
Even so, the August results were a big disappointment for retailers, who consider it to be one of the most important sales months because it kicks off the back-to-school season. It's also considered a harbinger of shopping trends for the crucial Christmas shopping season.
Yesterday's report showed that sales at U.S. apparel stores rose 1.0 percent, while department store sales advanced by 0.7 percent. Auto sales, meanwhile, increased only 0.1 percent.
In nondurable goods industries, restaurant sales declined 0.4 percent, while drugstore sales rose 0.4 percent. Gasoline service station sales dropped 0.9 percent, reflecting a recent drop in prices at the pump. Food store sales, meantime, fell 0.7 percent; furniture sales declined 0.2 percent; and building material and hardware sales decreased 0.7 percent.
Pub Date: 9/14/96