Weak Retail Sales, Inflation Data Cloud Rate Hike Outlook

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Michael Dwyer/AP
By Lucia Mutikani

WASHINGTON -- U.S. retail sales barely rose in September and producer prices recorded their biggest decline in eight years, raising further doubts about whether the Federal Reserve will raise interest rates this year.

The weak reports Wednesday were the latest suggestion that the economy was losing momentum in the face of slowing global growth, a strong dollar, an inventory correction and lower oil prices that are hampering capital spending in the energy sector. Job growth braked sharply in the past two months.

%VIRTUAL-pullquote-The softness of September's figures supports our view that the Fed probably isn't going to hike interest rates until early next year.%"The softness of September's figures supports our view that the Fed probably isn't going to hike interest rates until early next year," said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.

The Commerce Department said retail sales edged up 0.1 percent last month largely as cheaper gasoline pushed service station receipts down 3.2 percent. Giving the report a weak tone, sales in August were revised down to show them unchanged instead of rising 0.2 percent.

Retail sales excluding automobiles, gasoline, building materials and food services slipped 0.1 percent last month after a downwardly revised 0.2 percent gain in August.

These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product and were previously said to have advanced 0.4 percent in August.

Last month's weak core sales and the downward revision to August's figure, together with another report from the Commerce Department showing business inventories were again unchanged in August, prompted JPMorgan to cut its third-quarter GDP estimate by half a percentage point to an annual rate of 1 percent.

The economy grew at a 3.9 percent pace in the second quarter. Some economists, however, cautioned against reading too much into the soft retail sales report, noting that discretionary spending remained fairly healthy.

Consumers boosted their purchases of automobiles and furniture and spent more on hobbies, clothing and eating out. That points to underlying strength in domestic demand which should provide some cushion against softening global growth.

Consumer Spending Still Strong

"But the overall message is that consumer spending has remained extremely strong. If sentiment had indeed shifted, it would be hard to explain why sales of cars, certainly among the more expensive items, jumped in September to their highest level since July 2005," said Harm Bandholz, chief economist at UniCredit Research in New York.

Sales of electronic goods were soft despite the launch of Apple's (AAPL) latest iPhone. Some economists said they expected the boost from the iPhone in October.

Stocks on Wall Street fell after Walmart Stores (WMT) warned that its full-year sales would be flat because of dollar strength. Prices for U.S. Treasury debt rose, while the dollar dropped against a basket of currencies.

In a separate report, the Labor Department said its producer price index fell 0.5 percent in September, the largest drop since January, after being unchanged in August.

In the 12 months through September, the PPI fell 1.1 percent after declining 0.8 percent in August. It was the eighth straight 12-month decrease in the index.

The weak inflation environment is one of the obstacles confronting Fed policymakers who are contemplating raising rates for the first time in nearly a decade. The U.S. central bank has kept its short-term interest rate near zero since late 2008.

"It is the uncertain course of inflation that could keep the Fed from hiking rates this year. Unfortunately, the gang that cannot communicate straight is still sending out as many unclear signals as possible," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

Top Fed officials are divided on whether to tighten monetary policy, with Governor Daniel Tarullo saying Tuesday the central bank should not hike rates this year. Fed Chair Janet Yellen and Vice Chair Stanley Fischer have recently said they support raising rates this year.

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9 Numbers That'll Tell You How the Economy's Really Doing
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Weak Retail Sales, Inflation Data Cloud Rate Hike Outlook
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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