Sales Probably Cooled as Fuel Prices Rose: U.S. Economy Preview

Sales at U.S. retailers slowed in October as rising fuel prices and falling property values left Americans with little extra cash to spend, economists said reports this week will show. Purchases rose 0.2 percent after increasing 0.6 percent in September.

Consumer spending, a mainstay of the expansion, will continue to cool as Americans skimp on items such as clothing and furniture to pay their energy bills. The jump in fuel costs keeps inflation risks alive, preventing the Federal Reserve from lowering interest rates again soon.

There is no question that things are slowing, said Mark Vitner, a senior economist at Wachovia Corp. in Charlotte, North Carolina. It's primarily due to the higher prices of energy. Consumers are cutting back on all kinds of discretionary purchases.

The projected increase in October sales would be the smallest in four months. Purchases excluding automobiles increased 0.3 percent after a 0.4 percent September gain, according to the median forecast in the Bloomberg survey.

Unseasonably warm weather last month made matters worse for merchants as demand for jackets and sweaters waned. Seven out of 10 retailers, including Wal-Mart Stores Inc. and Macy's Inc., reported October sales below analysts' forecasts, according to a report last week from Retail Metrics LLC.

Chain-Store Sales

Sales at chain stores increased 1.6 percent from the same month last year, the worst October since 1995, the International Council of Shopping Centers said last week. The results, based on 44 chains, missed the New York-based group's 2 percent forecast and suggest a slowdown in holiday spending.

The housing slump may also be partly responsible for decreasing demand for furniture and appliances, economists said. A report from the National Association of Realtors on Nov. 13 may show the real-estate recession was getting worse.

The number of Americans signing contracts to buy previously owned homes dropped to the lowest level on record in September, the agents' group is forecast to report. Higher credit costs and lending restrictions after the collapse in subprime mortgages may mean the industry's slump will linger well into 2008, economists said.

Housing will probably be bad for the next 18 months, said Jeffrey Immelt, chief executive officer of General Electric Co., in a Nov. 8 PBS interview with Charlie Rose. We have to be cautious about the U.S. consumer. The consumer has used their house as a piggy bank.

Prices Rise

A Labor Department report Nov. 15 may show prices paid by consumers rose 0.3 percent in October for a second month, according to the survey median. Excluding food and energy, so- called core prices probably increased 0.2 percent for a fifth consecutive month.

Gasoline and heating oil prices rose late in the month, suggesting the inflation news will only get worse.

We will see the higher energy prices show up in the November data next month, said Wachovia's Vitner.

Fed policy makers won't have the November figures available until three days after their final meeting of the year on Dec. 11. For that reason, economists forecast the central bank will keep the target interest rate unchanged until early next year, according to the median forecast of economists surveyed this month.

Balanced Risks

The Fed currently views the risks of higher inflation and slower growth as being equally balanced after it lowered the rate target twice in as many months, Chairman Ben S. Bernanke said Nov. 8 in testimony to Congress. The jump in fuel costs is aggravating both concerns, he said.

Further sharp increases in crude oil prices have put renewed upward pressure on inflation and may impose further restraint on economic activity, Bernanke said.

Finally, factory reports this week may show manufacturing has cooled last month as consumer demand slowed. Industrial production rose 0.1 percent, the same as September, the Fed is projected to report Nov. 16.

The figures suggest the two-year housing slump is spilling over to other areas. Still, a weaker dollar and stronger growth abroad are boosting demand from overseas and will keep output from tumbling, economists said.

Source - Bloomberg