Consumers bought fewer new cars last month and turned to discount retailers, a sign the boost to the U.S. economy from spending may be starting to fade, government statistics are likely to show this week.
Retail sales probably fell by 0.2 percent in May, the Commerce Department is expected to report Thursday, according to a survey of economists by Bloomberg News. That would follow a 1.2 percent surge in April sales that was the biggest since October.
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“The economy hit a soft patch in May,” said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi Ltd. in New York. “If there’s no pent-up demand, you’re not going to see a lot of consumer purchases made. If that persists, it would be something to worry about.”
Sales of cars and trucks made by General Motors Corp. and Ford Motor Co. declined last month, while consumers spent less at department stores and more at discounters such as Wal-Mart Stores Inc., industry figures already showed.
Consumers are reluctant to make purchases unless merchandise is discounted. Sluggish May sales prompted General Motors to boost incentives, evidence companies lack the ability to raise prices and also a sign inflation is subdued.
Vehicle discounts in May helped keep wholesale prices tame during the month, a Labor Department report will probably show on Thursday. The producer price index, a measure of prices paid to factories, farms and other producers, probably rose 0.1 percent, after a 0.2 percent drop the prior month, according to economists surveyed by Bloomberg News.
Fed May Wait
With few signs of accelerating inflation, Federal Reserve policy makers have room to keep their benchmark overnight bank lending rate at a four-decade low of 1.75 percent as the economy recovers from recession. That will make it easier for consumers and businesses to finance purchases and keep the economy growing.
“I think it’s very clear that the current rate of inflation is pretty darned low and we’re getting awfully close to some zone of price stability, if we’re not already in it,” said Donald Kohn, a senior Fed staff official who was appointed last month by President George W. Bush to fill one of two vacancies on the Fed’s Board of Governors. Kohn was speaking to the New York Money Marketeers last week.
Demand has been hearty enough so far this year that factories are making more as businesses are left with lean inventories. A report Friday from the Fed is expected to show that industrial production increased in May for a fifth straight month. Factory, mine and utility production probably rose 0.4 percent last month,
matching April’s increase, according to economists surveyed by Bloomberg News.
And while vehicle sales stumbled in May, the strength of sales in prior months drew down car and truck inventories, requiring automakers to step up production.
Inventories Falling
Business inventories probably declined 0.2 percent in April from a 2 1/2-year low in March, Commerce Department figures are expected to show on Friday. That would be the 15th straight drop.
The inventory-to-sales ratio, which measures the time goods sit on shelves, fell to 1.38 months in March, the lowest in two years, “suggesting the need for some inventory building,” said Steve Wood, chief economist at FinancialOxygen Inc. in Walnut Creek, California.
Companies pared inventories at an annual rate of $25.7 billion during the first three months of the year, according to the government. That followed a record $119.3 billion rate of reduction in the fourth quarter of 2001.
Cars and light trucks sold at a 15.7 million annual rate last month, slower than the April’s 17.3 million pace, which was the strongest since November, according to industry figures. Sales at General Motors and Ford dropped 12 percent, prompting the world’s largest automaker to increase cash incentives by as much as $750 on some pickup trucks and sport-utility vehicles.
Sales Ex-Autos
Excluding autos, the government’s retail sales report will probably show sales rose 0.3 percent in May after rising 1 percent in April. Sales at stores open at least a year increased 3.4 percent in May, according to the Bank of Tokyo-Mitsubishi Ltd.’s index of more than 80 chains.
Discount retailers such as Wal-Mart and Kohl’s Corp. had the biggest gains as consumers remained careful about where they spent money. The pace of sales slowed from the average 4.8 percent gain between January and April.
Unusually cool weather reduced demand for items such as summer apparel and lawn and garden equipment, analysts said. Wal-Mart’s sales rose 6.2 percent and Kohl’s sales were up 8.7 percent. Sears, Roebuck & Co., the largest U.S. department-store chain, had a greater-than-expected 4.4 percent decline.
Bloomberg News
