Retail Sales Drop 0.5% as Inflation Inches Up : Economy: The nation's trade deficit soars to the highest level in a year and a half.

TIMES STAFF WRITER

Retail sales fell 0.5% in August as wary consumers cut back on purchases of cars, furniture and other big-ticket items, while surging prices for fruit and vegetables caused inflation to rise at an annual rate of 3.5%, the government reported Tuesday.

The drop in retail sales was the largest in five months and signals continued consumer reluctance to spend in times of high unemployment and weak income growth, economists said.

"The economy is continuing to struggle through a period of structural readjustment," said Joel Popkin, president of a Washington consulting group. "A lot of it is due to foreign competition and overbuilding of commercial real estate. Until these things adjust, the economy won't grow very much."

The economy remained flat despite government efforts to spur recovery. The latest figures were not good news for the Bush Administration because they come in the final months of an election year in which voters have identified the lingering recession as their greatest concern.

The decline in retail sales was larger than expected but was offset in part by an upward revision of July retail data. New figures for July sales show an increase of 1.0%, twice the level first reported.

Other government statistics indicated that the economy remains sluggish. From April through June, the nation's overall trade deficit soared to $17.8 billion, three times the first-quarter deficit and the largest in 1 1/2 years, the Commerce Department said.

In another report, average weekly earnings rose 1.5% in August, after falling 0.2% in July. But income rose largely for people who worked longer hours and therefore does not reflect an overall jump in full-time employment, economists said. After factoring in inflation, there has been no real wage increase over the year.

The rise in August of the consumer price index, which tracks inflation, was slightly higher than expected and pushed the annual rate somewhat higher than the 3.1% for the 12 months ending in August.

The August increase was partly caused by a dramatic 8.6% jump in prices for fruits and vegetables. Weather problems in South America and California's Salinas Valley helped push up prices for bananas and supermarket lettuce by more than 20%.

In addition, the first drop in gasoline prices since February was offset by increases for fuel oil, natural gas and electricity, pushing energy prices 0.2% higher overall. Excluding energy and food, prices increased by 0.2%, as expected.

A low inflation rate would allow Federal Reserve policy makers to continue cutting interest rates to fuel increased growth, economists said.

Economists expressed optimism about an apparent slowing in the steep rise of health care costs. Medical prices rose 0.4% in August, and economists said that if present trends continue, medical costs will rise a total of 5% to 6% in 1992, compared to 7% for the 12 months ending in August.

Observers have said that higher health care costs are a major restraint on consumer spending. Without the fear of unexpected health care expenditures, people may be willing to invest in other goods.

Economy at a Glance

Consumer prices rose 0.3% in August, reflecting food prices, the government said. A series of reports seven weeks before the election portray the economy as stagnant:

* Consumer Prices: The Labor Department reported an 8.6% rise in fruit and vegetable prices, offsetting a 1.2% drop in gasoline. Bananas, lettuce and vegetable prices were boosted by weather problems. Clothing prices were unchanged. Medical care costs rose 0.4%. Auto prices rose.

* Inflation: If continued for 12 consecutive months, the August price increase would produce a 3.5% inflation rate. However, inflation has been running at a 2.9% annual rate for eight months.

* Retail Sales: The Commerce Department reported a sharper than expected drop of 0.5%in August, with declines in big-ticket items such as automobiles and furniture.

* Trade: The trade deficit soared to $17.8 billion from April through June, three times the first-quarter imbalance, the Commerce Department said.

* Personal earnings: Average weekly earnings, adjusted for inflation, rose 1.5% in August after dipping 0.2% in July, the government said.

* Outlook: Analysts said these reports, coupled with a reduction in German interest rates on Monday, make it more likely there will be another cut in short-term U.S. interest rates, already near 30-year lows.

Source: Times wire reports

Retail Sales

Seasonally adjusted, billions of dollars

Aug. '92: $159.7

July '92: $160.6

Aug. '91: $152.2

Source: Commerce Department

Consumer Price Index

Percent change from prior month, seasonally adjusted

Aug. '92: +0.3%

July '92: +0.1%

Aug. '91: +0.3%

Source: Labor Department

U.S. Current Account

The broadest measure of U.S. foreign trade. Quarterly balance in billions of dollars.

1991:

2nd. Qtr.: -$2.4

3rd. Qtr.: -$11.1

4th. Qtr.: -$7.2

1992:

1st. Qtr.: -$5.9

2nd. Qtr.: -17.8

Source: Commerce Department

U.S. Current Account, AP / Los Angeles Times

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