EYE ON
AMERICA Slow, but steady, as she
goes By Peter Morici
On
Tuesday, the US Commerce Department reported that
February retail sales were up 0.1% from January.
Less automobiles and parts, retail sales fell
0.1%. The consensus forecasts were for increases
of 0.3% for both numbers.
Compared with a
year ago, January retail sales were up 3.2%, and
excluding automobiles and parts, retail sales
increased 3.1%. This sluggish growth indicates
that the US economy continued to consolidate
during February, and first-quarter growth in gross
domestic product (GDP) is
more likely to come in at less than the 2.5%
forecasters had predicted.
Cold February
weather, snow and ice considerably discouraged
shoppers. Along with moderate February growth in
jobs, this tepid advance in retail sales indicates
that the US economy has not lost its footing, but
only modest growth may be anticipated for the
first quarter.
At this juncture the
likelihood of a recession in 2007 is only one in
three, and the US Federal Reserve is not likely to
change its interest-rate policy before its August
meeting.
After Wall Street has an
opportunity to digest Tuesday's news, the
prospects for stable interest rates should help
firm up stock prices.
Gasoline prices
and retail sales In February, the average
retail price of gasoline was up about 1.5%, and
this had a modest impact on sales in other
sectors. Non-gasoline purchases were virtually
unchanged, and retail sales, less gasoline and
autos, were down 0.3%.
Gasoline prices are
rising dramatically higher in March, and this is
likely to continue through April, but the impact
of higher fuel prices on sales of large
sports-utility vehicles and trucks is likely to be
modest. Gasoline prices were much higher last
summer, and that surge had a lasting effect on car
buyers' expectations. The dip in fuel prices from
September through January did not do much to
revive interest in large vehicles.
With
February cold weather driving up crude-oil prices
and driving down gasoline inventories, higher
gasoline prices were already built into consumers'
expectations and car-buying habits. General Motors
and Ford face a chilly spring and tough summer
markets. Fortunately, Toyota and other Asian
nameplates are making more of what they sell in
the United States.
Auto, housing and
stock prices Although the US housing
market has softened since last summer, home prices
are still up about 55% over the past five years.
As important, the pace of existing home sales
remains robust, indicating that homeowners enjoy
considerable liquidity. This dramatically sets
apart the current situation from the US housing
crisis of the early 1990s.
While
homeowners may not expect much appreciation over
the next year or so and values will fall in some
cities and communities, they still have a lot of
untapped equity to finance additional spending.
The reservoir of wealth created by the housing
boom has not evaporated, and much of it is yet to
be spent.
Losses in subprime lending will
most affect firms that specialize in brokering
these loans, but most subprime borrowers can be
transitioned into conventional mortgages. The
broader impact of defaults will be modest and
widely dispersed across capital markets. Needed
changes in lending standards will not prove too
discomfiting.
The resiliency of the US
mortgage-financing sector has dramatically
improved since the savings-and-loan crisis of the
1980s. Adequate access to mortgage financing will
remain available to sustain the resale market and
finance a recovery in new home construction this
year.
Overall, housing values are
providing US consumers with ballast as the economy
and jobs grow more slowly.
Stock prices
are still up about 11% since August, and this has
compensated for falling home equities on household
balance sheets.
The realization that
housing prices are moderating but not collapsing,
enduring real-estate liquidity and a buoyant stock
market should keep consumers spending through
2007, albeit increasing at a more moderate pace
than in recent years.
In 2007, retail
sales should advance at a 5-6% pace, and support
GDP growth in the range of about 2.5%. The Federal
Reserve should not raise interest rates, and the
outlook for stock prices remains strong, as
profits continue to grow, especially among firms
with significant overseas operations.
Supported by decent retail sales and
overseas profits, stock prices should continue to
rise.
Peter Morici is a
professor at the University of Maryland School of
Business and former chief economist at the US
International Trade Commission.
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
