US Economy Still Sagging

By Glenn Dyer | More Articles by Glenn Dyer

So if inflation remains under control,does that mean the US economy is not facing a period of stagflation but is merely stagnating?

And if it is, is the reason for the sluggishness the drag from the slump in housing which this week will be shown to be continuing?

It could very well be.

Friday saw figures showing more evidence that inflation is under control in the US.

“Core’ US producer prices were unchanged for the second month in a row but retail sales unexpectedly fell in April and business inventories also slipped lower in something of a surprise to economists.

These figures were taken to mean no increase in rates but alsogoing some way to the undermining of the anti-inflation stance the US Fed reaffirmed on Thursday in its statement with its decision to leave the key official rate steady on 5.25 per cent.

“Rate cut looms” wasn’t in every analysts email headline but quite a few suggested that the US economy continues to lose momentum.

Retail sales unexpectedly dropped 0.2 per cent in April after a revised 1 per cent rise in March, according to the figures from the US Department of Commerce.

At the same time, a Labor Department report showed US producer prices excluding food and fuel costs were unchanged for a second month.

The retail sales figures came a day after Wal Mart and other major retailers reported lower sales numbers for April and they raise concerns that US consumers are curtailing spending which, if the slack isn’t picked up by business, could mean a sharper slide in US economic growth.

Consumer spending supported the poor 1.3 per cent annual growth rate in the first quarter and economists say the pace of consumer spending has slowed since then.


That’s why the report on business inventories was a concern.


Another Commerce Department report showed inventories at businesses unexpectedly fell in March; down 0.1 per cent at factories, retailers and wholesalers after rising a revised 0.2 per cent the prior month.


Economists had projected retail sales to rise by 0.4 per cent after the original March gain of 0.7 per cent. No one looked at a fall. March was pushed up to a one per cent gain which made the 0.2 per cent drop in April even more of a surprise.


The fall in retail sales was led by lower sales at car dealers, building supply and clothing stores. Petrol sales rose because of higher prices. Stripping those out and the retail sales slide was bigger than the final figure suggested.


US petrol prices are back over the $US3.04 a gallon mark.


The American Automobile Association said the price rose 26c a gallon in April to an average $US2.83. They have risen another 21c so far in May as the US supply of petrol sits at 16 year lows in some regions because of refinery breakdowns and a lack of refining capacity.


Economists say those higher petrol prices (which are being exacerbated by the lower US dollar pushing up import prices, especially of oil and petrol stocks), impacted retail sales and will continue to do so. That’s why they feel the May figures won’t be encouraging when released in a month’s time.


It was a year ago last weekend that world copper prices hit a record $US4.04/lb in New York, and oil prices continued to rise through the month before easing, and then kicking higher in August to more than $US78 a barrel on the Israel-Hezbollah war.


A sign of the continuing impact from the housing slump came with stores selling building materials and garden supplies reporting a 2.3 per cent fall in sales in April, the largest decline. That doesn’t augur well for Home Depot, which is due to report quarterly earnings this week.


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The Dow added 111 on Friday after falling 142 points on Thursday, to close at 13,326. The S&P 500 ended at 1505.85 while Nasdaq rose 28 to 2562.


For the week, the Dow rose 0.4 per cent, the S&P 500 was all but steady and Nasdaq fell 0.4 per cent.

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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