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>>> Consumers are in the driver’s seat
By Rex Nutting, CBS.MarketWatch.com
Last Update: 6:38 PM ET Jul 7, 2000 NewsWatch
Latest headlines
WASHINGTON (CBS.MW) -- The consumer is king.
Everything the Federal Reserve is trying to do to slow the economy depends on the consumer’s reaction.
If consumers really have stopped spending more than they earn, then the Fed’s job is nearly done.
But if consumers decide to resume their shopping binge, it could be a long summer, fall and winter for the Fed, and for investors.
The government will report on June retail sales on Friday, July 14. It’ll be the highlight of a fairly busy calendar for government number crunchers.
Also on tap in the coming week: Consumer credit, consumer sentiment, import prices, industrial production and the producer price index.
PPI
The PPI, of course, is a closely watched inflation gauge, and inflation is what the Fed is supposed to really care about.
But the PPI is old news by now.
“We’re resigned to a very large headline increase in the PPI” because of higher oil prices, said Cary Leahey, economist at Deutsche Bank. Oil prices jumped in June ahead of the agreement of the Organization of Petroleum Exporting Countries to increase production.
Oil prices have since fallen back, so they’ve become less of a concern. At least for now.
The consensus forecast from our survey of economists puts the increase in the PPI in June at 0.5 percent. The core rate, which excludes food and energy prices, is expected to climb just 0.1 percent. See Economic Forecast.
Given what’s happened with oil since mid-June, a big headline number shouldn’t bother the markets, Leahey said. However, a 0.3 percent gain in the core rate would spell trouble.
Retail sales
Oil prices could also impact the retail sales numbers. The gains will come more from higher prices than from higher volumes, Leahey said.
The consensus calls for a gain of 0.3 percent in retail sales in June with an identical gain in sales excluding autos.
“It’ll be another soft number,” Leahey said. He’s looking for 3 percent annualized growth in consumer spending in the second quarter, about half of the first quarter’s 7.7 percent pace.
After increasing spending at the fastest rate in 17 years during the first quarter, consumers took a break in April and May. Retail sales fell 0.6 percent in April and 0.3 percent in May. Personal spending rose just 0.2 percent in each of those months.
“Consumers stepped back and caught their breath” in April and May, said Dan Laufenberg, chief U.S. economist at American Express Financial. He’s forecasting a gain of 0.6 percent in June.
Laufenberg foresees healthy gains in durable goods in June. Auto sales won’t be a negative, he said, and building materials and furniture should also be higher.
On the non-durable side, gas station sales should be higher, reflecting the jump in prices. Apparel sales, on the other hand, will be held back by further declines in prices due to the continuing strong dollar, Laufenberg said.
The Fed
If the retail sales report comes in as forecast by Laufenberg, it would present something of a dilemma for the Fed. The boost in consumer spending could be ignored as reflecting higher prices more than stronger demand.
That would support the theory that demand is slowing, but at the cost of more inflationary warning flags. Would the Fed ease off on its rate hikes because demand is slowing? Or would the Fed feel compelled to keep tightening the screws to combat the inflation?
The problem for the Fed is that the consumer’s fundamentally favorable position hasn’t been altered by its rate hikes. Higher interest rates may have dented home sales, but the consumer still has confidence that jobs are available and that incomes are rising.
“When they have the means to spend, they do,” Laufenberg said.
The implication of Laufenberg’s analysis is that consumers won’t stop spending until their confidence in the labor market wavers.
“The Fed will never say they want to raise the unemployment rate, but that’s exactly what they have to do, in my opinion,” Laufenberg said.
Even getting the jobless rate back up to 4.5 percent or 5 percent will take time, if the Fed follows its preferred gradual approach.
The debate over spending shows the Fed forecast isn’t as simple as the markets assume. Following Friday’s jobs report, expectations of an August rate hike fell to 35 percent in the Fed funds futures market.
But economists surveyed by MarketWatch.com are putting the odds at closer to 50 percent. They know there’s lots of data to come between now and August.
“The Fed has the luxury of looking at another set of data” before the Aug. 22 meeting, Laufenberg said.
Investors should remember that it’ll be July’s retail sales and July’s PPI and even July’s jobs and consumer price index that’ll matter most to the Fed, not the numbers being reported this month.
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Rex Nutting is Washington bureau chief of CBS.MarketWatch.com.<<< |
