WASHINGTON - The U.S. economy is still packing a lot of punch despite an apparent slowdown in consumer spending during the spring, analysts said yesterday.
The Commerce Department reported that retail sales in May slipped 0.2% as purchases of autos and other durable goods fell sharply for the second straight month. The decline followed a revised 1.1% downturn in April sales and marked the first back-to-back monthly decrease since February and March 1993.
A separate report from the Labor Department said the consumer price index rose a modest 0.2% in May, suggesting that inflation remains muted. Compared to a year earlier, prices were up only 2.3%. Excluding food and energy, prices rose 0.3% for the month and 2.8% compared to a year earlier.
The bond market rallied in reaction to both reports as some analysts concluded that Federal Reserve officials are not likely to raise short-term interest rates again when they meet July 5. "The data only confirm the view that the Fed isn't about to tighten policy any time soon," said David Greenlaw, an economist with Morgan Stanley & Co.
However, analysts said they still believe that the economy is continuing to expand at a pace above its long-term potential. "Our view is, yes, the economy slowed down, but the consumer is not going to stay on the rocks for very long. This is a pause, not a halt," said Susan Hering, an economist at Salomon Brothers Inc. "There's still a lot of strength and momentum in the economy."
Auto sales slumped for the second straight month, falling 1.9% after an even steeper drop of 2.4% in April, the Commerce Department said. Analysts said the decline reflected a shortage of some popular models that kept consumers on the sidelines. Consumer purchases of auto repairs, insurance, medical care, and other services not covered by the retail report appear to be holding up.
Economists also said some slowing of consumer spending in the period from April to June was expected following the first quarter, when GDP rose 3% and spending shot up 4.6%.
Many economists continue to estimate that the economy grew between 3% and 4% in the second quarter, well above the pace of sustainable growth. Fed Governor Lawrence Lindsey, interviewed yesterday on CNBC, estimated that the economy's growth potential is in the range of 2.5% to 3%. Other economists believe the rate is closer to 2.5%.
Carl Palash, chief economist for MCM Money Watch, estimated that consumer spending, which accounts for two-thirds of GDP, slipped to between 1% and 2% in the second quarter while the overall economy grew a hearty 4.5%.
"The real problem is that the economy is up against full employment from the Fed's point of view," said Palash. While Fed officials may sit still next month, they are still likely to tighten rates again in the fourth quarter, and possibly earlier, he said.
"I would characterize this as a consolidation," said Richard Berner, chief economist for Mellon Bank in Pittsburgh. "Consumer spending is getting more in line with income, and we're settling down for a moderate growth rate, but I don't think you can be complacent about the Fed."
Berner is at the high end of estimates for second quarter GDP, predicting growth of 5%, and believes members of the Federal Open Market Committee will probably tighten rates again at their July meeting.
While consumers cooled their spending, business fixed investment, construction spending, exports, and some inventory building by businesses all helped stoke the economy in the spring, Berner said.
Thomas Synott, chief economist for U.S. Trust Co. in New York, is looking for second-quarter GDP growth of about 3.5%. The Fed may stay its hand until later this year, he said, but a new worry for the central bank and the bond market is the weakening dollar, which has unraveled on comments by Clinton Administration officials that the trade war with Japan is not yet resolved.
Analysts at DRI/McGraw-Hill Inc., the Lexington, Mass., forecasting firm, said the latest figures confirmed their view that the economy is cooling rapidly. They are forecasting GDP growth will slip to around 2.5% in the second half of the year, and even less - around 2% - next year.
However, Cynthia Latta, senior financial economist at DRI, said inflation shows enough signs of picking up to force the Fed to raise rates once or twice more this year. She noted the core rate for CPI, which excludes food and energy prices, rose at a 3.4% annual rate in the last three months. Other analysts pointed out that the core rate was up a less threatening 3% during the first five months of the year.
