Decline in Retail Sales, Factory Operating Rate Eases Inflation Fears

Retail sales declined in August for only the second time this year, the government said Thursday, indicating to analysts that inflationary pressures in the economy are easing.

The Commerce Department said sales dropped by 0.2% last month to $133.5 billion, adjusted for seasonal variations but not for price increases.

Economists have been worried since the spring that rising export sales coupled with strong demand from U.S. consumers would put too much strain on the economy and fuel inflation.

The small drop in retail sales is an indication that American consumers are curbing their appetite for goods enough to allow factories to produce more for sale abroad, analysts said.

The Federal Reserve, in an effort to slow the economy by reining in domestic demand, has pushed interest rates higher since late March, and economists say the Fed’s tightening may be taking hold.

“I think things are looking just fine inflation-wise,” said Michael K. Evans, head of Evans Economics, a Washington consulting firm. “I think the Fed deserves an A. I think they tightened just enough to slow down the economy without sending it into a tailspin.”

Richard W. Rahn, chief economist of the U.S. Chamber of Commerce, was critical of the Fed.

“The threat of accelerating inflation is declining,” he said. “It no longer makes sense for the Fed to continue tight money policies which endanger economic growth.”

Inflation Concern

In a second report providing good news for inflation watchers, the Fed said Thursday that the operating rate at the nation’s factories dropped in August for the first time since February, by 0.1 percentage point to 83.8% of capacity. The rate also dropped in the mining sector, but both declines were offset by a temporary rise in rates at utilities related to the summer heat wave, leaving the overall industrial operating rate at 83.7% last month, up from 83.6% in July.

Factory operating rates have crept higher during the past year, raising concern that prices could rise if manufacturers had trouble producing to meet both the boom in exports and strong domestic demand.

August’s decline in retail sales, the first since April’s 0.4% drop, followed a revised 0.1% gain in July, which had originally been estimated at a stronger 0.5%.

Auto sales fell 1.8% in August to a seasonally adjusted $29.1 billion. It was the sharpest decline in this volatile category since October.

Excluding autos, sales last month rose a modest 0.2% after a slight 0.1% gain in July.

David Wyss, an economist with Data Resources Inc., a forecasting firm in Lexington, Mass., said strong car sales earlier this year were contributing to the weakness in August.

“Dealers don’t have as many leftover models to promote this year,” he said. In the past several years, they have been forced to offer incentives in August to clear lots in preparation for the new model year beginning in the fall.