March retail sales show slack demand

So far, the inflation hawks -- who argue that the large fiscal and monetary stimulus deployed by the federal government will lead to raging inflation -- have a pretty weak case.

Producer prices fell 1.2 percent in March, with the core rate registering no increase, the U.S. Labor Department announced Tuesday; each was below the Bloomberg News consensus estimates of 0.1 percent and 0.2 percent, respectively. Producer prices increased 0.1 in February and 0.8 percent in January, after declining 1.9 percent in December 2008.

Risk of deflation, not inflation

Equally significant, the year-over-year producer price trend remains benign: down 3.5 percent in the past 12 months, which was the PPI's biggest 12-month drop since 1950.

The March PPI report suggests that the nation's pronounced recession -- now in its 15th month -- is keeping inflation under control. Michael Moran, chief economist with Daiwa Securities America of New York, agrees.

"We're not likely to see upward pressure on prices, the risk is in the opposite direction," Moran told Bloomberg News Tuesday. "The near-term outlook is favorable for inflation" to remain tame, he said.

Business executives, economists and in particular Fed officials closely monitor the producer price index because it provides an early-stage warning regarding inflation. Fed officials pay especially close attention to the core-PPI statistic, which excludes the often-volatile food and energy component, to gauge core business costs.

March retail sales fall

U.S. retail sales unexpectedly fell 1.1 percent in March, the U.S. Commerce Department announced Tuesday -- well below the 0.3 percent gain seen in the Bloomberg News survey. Excluding automobiles, retail sales fell 0.9 percent in March; the ex-auto index rose 1.2 percent in February.

Two straight months of retail sales gains to start the year had boosted economists' and analysts' hopes that a resumption of pre-recession spending habits would take hold. March's retail sales data suggests that considerably more healing -- particularly in the job market -- in the U.S. economy must occur for that thesis to be confirmed.

"With employment declining sharply and credit restricted, households will spend cautiously this spring," Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts, told Bloomberg News Tuesday. "We expect that a slight rise in real consumer spending in the first quarter will be followed by a slight decline in the second quarter."

Economic Analysis: The two reports provide further evidence of the nation's pronounced recession. Demand is slack, as shown by the inability of retail sales to maintain positive momentum. Basically, people are buying only what they need, and are postponing or canceling discretionary purchases. And there is very little price pressure at the producer level -- prices have fallen 3.5 percent in the past 12 months -- a stat that Fed officials will view as indicative of near-deflationary conditions, if not an outright sign of deflation. Some economists will point to the 3.8 percent increase in the PPI's 12-month core rate as evidence of inflation pressure, but one should ignore the stat: it primarily reflects costs that had worked themselves into the system prior to and at the beginning of the recession.

Economist and business executives detest deflation because it robs companies of the ability to increase revenue and hurts the economy's ability to grow. If it takes hold, that's another hurdle policy makers will have to grapple with as they attempt to end the U.S. recession.

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