Wholesale Prices Fall, Sales Climb : Recession Fears Ease as Economy Hits Mild Upswing
Wholesale prices fell again in July and retail sales rebounded after months of stagnation, the government reported Friday, a combination that suggests there is still plenty of running room in the economic expansion that began almost seven years ago.
Pushed down by widespread auto rebates and cheaper gasoline, the producer price index fell last month by 0.4% after a 0.1% decline in June, the Labor Department reported.
Meanwhile, the Commerce Department said retail sales jumped 0.9% in July as car buying revived, putting to rest any fears of an imminent recession.
“It’s only one month’s evidence, but for now we’ve got the best of both worlds,” said Dirk Van Dongen, president of the National Assn. of Wholesaler/Distributors. “The economy is not too hot, but it hasn’t cooled off too much.”
Wall Street Rallies
The latest economic data triggered a sharp morning advance on Wall Street, pushing the Dow Jones industrial average briefly to an all-time record high. But the rally ran out of steam in later trading, perhaps as traders discovered evidence in the retail sales data that interest rates may not continue to decline.
By the end of the day, the Dow had fallen 28.64 points to 2,683.99, and interest rates had risen.
For now, experts agreed, with inflation easing and the sluggish economy experiencing at least a mild upswing, the Federal Reserve Board is likely to avoid any significant changes in interest rates when it meets later this month.
The Fed, which started relaxing its year-long tight grip on credit in early June, has been trying to slow the economy in hopes of engineering a “soft landing” in which inflationary pressures abate without a recession.
‘Bring Out the Champagne’
“Alan Greenspan (chairman of the Fed) has pulled off what most of his critics said couldn’t be done,” said Michael K. Evans, head of the Evans Economics forecasting firm. “Bring out the champagne.”
And Van Dongen pointed out that Greenspan became chairman of the Fed exactly two years ago. “This is just what the doctor ordered,” he said. “Happy anniversary, Chairman Greenspan.”
At the White House, where several officials have been worried that the Fed kept interest rates too high for too long, the latest economic reports were greeted with relief.
The nation is on “a sound economic course,” said presidential spokesman Marlin Fitzwater. “Unemployment is the lowest in more than a decade; inflation is going down; growth is steady.”
But some analysts, while agreeing that recession fears were overblown, contend that inflation may be only temporarily caged.
“It’s nowhere near as bad as the 1970s, but the U.S. economy is suffering from stagflation,” said David Hale, chief economist at Kemper Financial Services in Chicago. “The price of driving inflation back below 5% will be an extended period of high short-term interest rates.”
Back-to-Back Drop
After racing ahead early in the year, inflation should remain moderate for at least the next few months, however. The 0.4% drop in wholesale prices, the steepest decline in two years, followed a 0.1% dip in June. That was the first back-to-back drop since early 1986, when prices fell for four months in a row because of a collapse in energy costs.
Before the recent two-month decline, wholesale prices had been rising at an annual rate above 9%. While the inflation rate for the year so far is now a more moderate 5.7%, that still exceeds last year’s 4%.
Last month the producer price index stood at 114, which means that a basket of goods costing $100 in 1982 would have cost $114 in July.
The two most important factors pushing wholesale prices down were a 7.2% drop in gasoline costs and a 1.9% decline in new car prices. But analysts were encouraged that the core rate of inflation, excluding volatile food and energy costs, which are little affected by overall economic activity, fell by 0.2%.
The retail sales figures pointed to an economy that has been stronger than previously thought. Retail sales increased to a seasonally adjusted $143.7 billion in July following a 0.1% decline in June. But the surprising news was a sharp upward revision for May retail sales, which now appear to have jumped by 0.8% rather than falling 0.1% as reported earlier.
The revision showed that food and auto sales have been considerably stronger over the past three months than economists thought.
Car sales led the advance, jumping 2.7% to $31.7 billion after a 1% decline in June. But even excluding autos, which make up about 20% of all retail sales, the consumer seems to have returned to the shopping malls. Non-auto sales rose 0.4% after a 0.2% increase in June and a sharp 1.2% gain in May.
