Fears of a Mild Recession Eased by Latest Statistics : Economy: Increase in retail sales for June reported. Factory output has stopped declining, while inflation remains under control.
Lingering fears of a mild recession this summer were eased Friday with government reports that consumer spending is picking up again, production at the nation’s factories has stopped falling and inflation remains subdued.
“The worst is over,” said Lyle Gramley, chief economist at the Mortgage Bankers Assn. of America. “From here on in we can look forward to renewed momentum in the economy.”
Financial markets, however, reacted negatively to the new data, believing the reports make further Federal Reserve Board interest rate cuts less likely. The Dow Jones industrial average declined 18.66 points to close at 4,708.82, while bond yields rose moderately. Concern that the economy’s sluggish growth could signal a possible recession led the Fed to cut short-term interest rates last week, its first move to lower rates in nearly three years.
The strongest evidence of a reinvigorated economy came with a Commerce Department report that June retail sales, led by a jump in auto sales, rose by 0.7% to a seasonally adjusted $196.04 billion.
The gain, the second in a row, followed a higher-than-previously-reported May increase of 0.9%, the biggest rise since October. The department previously estimated that sales rose a mere 0.2% in May.
In a separate report, the Federal Reserve said output by the nation’s mines, factories and utilities edged up 0.1% last month--the first increase since January--after a 0.1% May drop as output of motor vehicles and parts recovered slightly after three straight declines.
But the increased economic activity did not spur higher inflation. The Labor Department reported that consumer prices edged up a smaller-than-expected 0.1% in June--the smallest rise since November--after a 0.3% rise in May. The so-called core rate of inflation, with erratic food and energy prices removed, rose 0.2% in June and in May.
Overall, prices this year at the consumer level are rising at an annual rate of 3.2%, compared to an increase of 2.7% for all of last year.
“It looks to me that we’re moving into the best of all possible worlds, with re-accelerating economic growth and abating inflation,” said Eugene Sherman of M.A. Schapiro & Co. in New York.
Private economists said investors were overreacting by driving stock and bond prices lower. They said that while Friday’s reports made it less likely that the central bank will cut interest rates when policy-makers next meet on Aug. 22, that does not mean there won’t be more rate cuts.
Sung Won Sohn, chief economist at Norwest Corp., said he was looking for the federal funds rate, which the Fed cut by a quarter point to 5.75% last week, to be down to 5% by the end of the year.
“The data show the economy has stopped declining, but it is still bouncing along the bottom and more rate cuts will be needed,” he said.
Analysts who had feared that the overall economy, as measured by the gross domestic product, shrank in the April-June quarter, said they now believe the GDP actually was slightly positive because of the newly disclosed strength in retail sales.
Meanwhile, the gain in industrial production gave rise to hopes that the sharp drop in manufacturing over the past three months was leveling off.
But even with the gain in output, America’s factories, mines and utilities operated at just 83.7% of capacity last month, the lowest rate in nearly a year and a half.
The tiny, 0.1% rise in the Consumer Price Index occurred despite the fact that energy costs shot up 0.5% for the second-straight month--gasoline prices rose 0.4%--and a 1.1% jump in electricity costs was the biggest in two years.
Food prices showed a small, 0.1% increase for the second-straight month. While fruit prices were up 4.5%, vegetable costs dropped by 3%, led by a 38.8% plunge in lettuce costs, the biggest one-month decline in 43 years.
Helping to hold down inflation was a further drop in clothing costs, which fell 0.3% in June, the fifth-straight month they have either declined or been unchanged. But airline fares surged 8.4% and are up 20.4% so far this year.
In Los Angeles, Orange, Riverside, San Bernardino and Ventura counties, prices fell 0.2%, the U.S. Department of Labor’s Bureau of Labor Statistics said Friday.
Sam Hirabayashi, the bureau’s regional commissioner in San Francisco, said food and fuel costs remained the same. Housing was slightly more expensive and home furnishings up by 2%.
So far this year, prices in the Los Angeles area have risen 0.9%, compared to the 0.4% decline reported for the first six months of last year.
In other evidence of a rebounding national economy, the University of Michigan’s mid-month report on its July consumer sentiment index was said to have shown an increase to 94.1 from 92.7 in June, according to market sources who have seen the report.
The university’s mid-month index for consumer expectations was said to have risen to 85.5 in from 84.1 in June.
* GOOD NEWS IS BAD
Stocks fall and bond rates rise on strong economic data. D2
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Consumer Prices
Percent change, month to month, seasonally adjusted:
June 1995: 0.1%
Source: Bureau of Labor Statistics
Retail Sales
Total retail sales in billion of dollars, seasonally adjusted:
June 1995: $196
Source: Commerce Department
