Wholesale Prices Hold Steady but Retail Sales Slump During Month

Wholesale prices were unchanged in June as energy prices resumed their downward trend, the government reported Friday, but a sharp drop in retail sales heightened concerns that the economic recovery may be coming to an end.

The 0.8% drop in retail sales, which included a 1.5% decline in auto sales, was the steepest monthly slump in the wholesale price index since a 1.4% drop last July. The index fell 0.5% in May, when auto sales were off 1%.

“A big question about the economy has been whether consumers can sustain their spending record of the first half of the year,” noted Allen Sinai, chief economist for Shearson Lehman Bros. “The retail sales report suggests that the answer is no. Everything suggests slower consumer spending in the third quarter.”

But Commerce Secretary Malcolm Baldrige chose to accent the positive. The two months of declines followed an unusually steep 3.1% sales increase in April, Baldrige said, and he insisted that consumer confidence, reported to be flagging in recent surveys, is as sprightly as ever.

Expects Resumption

“Combined with improved financial conditions, this suggests that retail spending will resume its growth and contribute to faster overall growth during the second half of the year,” Baldrige said in a statement.

If, instead, economic growth remains sluggish for the rest of the year, the silver lining is that inflation should remain at bay, perhaps laying the groundwork for a resurgence of growth later on.

The Labor Department said that wholesale prices, flat during June, increased at a modest annual rate of 1.4% during the first six months of 1985. Food prices declined at an annual rate of 5.9% for the period, more than offsetting a 2.2% increase in energy prices. Prices of other finished goods grew at an annual rate of 4.4%.

At the White House, spokesman Larry Speakes said the latest wholesale price figures “show the Reagan Administration is continuing to hold the line on inflation and doing well in that effort. The recovery remains the kind the President’s program has been aimed at all along: sustained growth with low inflation.”

The likelihood that worldwide petroleum prices will continue dropping for the rest of the year makes continued low inflation probable, economists said, even if the drop in food prices ends and the increase in prices for finished consumer and capital goods continues. Inflation at the wholesale level was 1.7% in 1984 and 0.6% in 1983.

“Energy prices will probably keep on declining through the rest of the summer,” said Donald Ratajczak, director of the economic forecasting project at Georgia State University. He noted that June prices for crude oil were lower after several months of increases--a sure harbinger of lower refined prices later on.

With the Organization of Petroleum Exporting Countries unable to enforce its price floors, energy prices should continue pulling the wholesale price index down for the rest of the year, Ratajczak said.

Sarah Johnson, an analyst with Data Resources, said even a weakening dollar, which makes imports more costly and relieves downward price pressure on domestic goods, probably will not drive up consumer prices substantially.

“The outlook is very good on inflation,” she said. “With the economy softening, we don’t see any new impetus for higher inflation other than the falling dollar and that will be more than offset. The trend remains favorable.”

Ultimately, the softening dollar should help stem the flood of imports that has swamped the economy and driven the merchandise trade deficit to a record $57.3 billion through May. After rising quickly through March, the dollar fell to its low for the year this week.