EYE ON
AMERICA Shot in the arm for
stocks By Peter Morici
On Monday, the US Commerce Department
reported March retail sales were up 0.7% from
February. Less automobiles and parts, retail sales
advanced 0.8%. Compared to a year ago, March
retail sales were up 3.8%, and excluding
automobiles and parts, retail sales increased
3.9%.
This substantial advance in retail
sales is welcome news for the economy and the
stock market. Cold February weather, snow and
ice
discouraged shoppers, and consumers exhibited new
vigor in March.
Along with moderate March
jobs growth, this advance in retail sales
indicates the economy has regained its footing,
and moderate gross domestic product (GDP) growth
will continue through the first and second
quarters.
At this juncture, the likelihood
of a recession in 2007 is only one in four, and
the Federal Reserve is not likely to change
interest rate policy soon.
All this sets
the stage for robust gains in stock prices.
Gasoline, auto, housing and stock
prices In March, the average retail price
of gasoline was up 29 US cents, or about 12%.
Gasoline prices fell 7 cents in January and rose 3
cents in February. The recent surge in gas prices
did not dramatically affect other retail sales.
Non-gasoline purchases were up 0.4% in March, and
retail sales less gasoline and autos were also up
0.4%.
Gasoline prices are continuing to
rise in April, but consumers will likely absorb
these as they did in March. Although the housing
market has softened since last summer, home prices
are still up about 55% over the past five years.
As importantly, the pace of existing home sales
remains robust, indicating homeowners enjoy
considerable liquidity. This dramatically sets
apart the current situation from the 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, homeowners 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 the subprime
lending will most affect firms that specialized 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
discomforting.
The resiliency of the
mortgage financing sector has dramatically
improved since the Savings and Loan Crisis.
Adequate access to mortgage financing will remain
available to sustain the resale market and finance
a recovery in new home construction later this
year.
Overall, housing values are
providing consumers with ballast as the economy
and jobs grow more slowly.
Stock prices
are still up about 15% 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 growing at a more moderate pace than
in recent years.
In 2007, retail sales
should advance at about a 5% pace and support GDP
growth in the range of about 2.4%. 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 advance
about 10% in 2007.
Strong sectors In January, retail sales were particularly
strong for furniture, building materials and
garden supplies. Homeowners tend to spruce things
up when they decide not to sell and stay in their
homes a few more years.
Other strong
sectors included clothing and accessories, and
sporting goods, hobby and book and music stores.
Peter Morici is a professor at
the University of Maryland School of Business and
former chief economist at the US International
Trade Commission.
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