Image: Retail sales
Mike Wilson, from Fairfax, Va., looks at Atlanta Braves jerseys in the Braves Clubhouse store in downtown Atlanta last month. August's retail sales increased 0.8 percent.
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msnbc.com

Consumers may be getting glummer about their financial prospects, but their jitters have not stopped them from spending like mad at the nation’s malls and auto showrooms. For now that’s enough to keep the economy chugging along in slow-growth mode, but economists worry that without any improvement in the labor market, spending is bound to dry up.

Consumer sentiment fell in early September to its lowest level of the year, reflecting the impact of war talk, stock market weakness and concern about terror attacks heightened by the 9/11 anniversary, analysts said Friday. But retail sales, boosted by another wave of automaker incentives, rose for a third straight month in August, the government said.

“There is no way you could look at the retail sales data we have seen thus far and portray that as a picture of weakness - it’s just not,” said Steve Slifer, co-chief U.S. economist at Lehman Bros. “But confidence levels are just above where they were in September. We’re getting antsy. The obvious question is, can we maintain this rate of spending?”

His answer is no. The economy has added a relatively paltry 160,000 jobs over the past four months, but at least the direction has been positive. Slifer expects the four-month streak of gains to be broken in September. Based on the trend of rising claims for unemployment insurance, he predicts the economy will lose 10,000 jobs this month.

And he questions how long low interest rates can continue to drive fresh waves of spending. Auto sales are likely to fall a bit this month as automakers cut back on incentives for the new model year. With mortgage rates already at their lowest levels in more than 30 years, another wave of cash-out refinancing activity after the current one seems unlikely. Federal tax cuts have helped boost consumer income this year, but no further reductions are scheduled until 2004.

This summer’s surge in auto sales is likely to help the gross domestic product to a healthy 3.5 percent growth pace this quarter, but Slifer predicts that will fall to 1.5 percent in the fourth quarter, forcing the Federal Reserve to cut short-term rates from their already low levels to inject a bit more stimulus.

Gerald Cohen, senior economist at Merrill Lynch, agrees that it is unrealistic to expect consumers to sustain the current pace of spending without more substantial job growth.

“You’re definitely going to see some payback,” he said. Consumer spending is likely to grow by 5 percent in the current quarter and 2 percent in the fourth quarter before settling back to a “fairly modest” growth rate of about 3.25 percent. “That keeps the recovery on track, but it’s not exceptionally strong.”

“It’s more of the same,” said Stuart Hoffman, chief economist for PNC Financial. “It’s what I call a half-speed recovery. … Half-speed isn’t enough to put a big dent in the unemployment rate, and it’s not enough to lift consumer spirits.”

It’s not enough to lift investor spirits, either. In a week dominated by 9-11 remembrances and rising pressure on Iraq, the Dow Jones industrial average lost 0.8 percent and other major indicators also continued their losing ways.

The consumer sentiment number was one factor troubling investors Friday, although many economists consider it an unreliable indicator. Watch what consumers do, not what they say, is the oft-repeated mantra.

Major Market Indices

Still, there are plenty of reasons for the declining long-term expectations expressed by consumers in the survey, said Steve Stanley, senior market economist at Greenwich Capital.

“The bottom line is that as the stock market has eroded their retirement nest eggs and a soft labor market threatens their income, consumers have lost some of the optimism that was building early in the year,” he said in a note to clients. “Clearly, there is a substantial risk that consumer expenditures begin to soften under the weight of the various familiar negative influences, but so far, the unsinkable consumer appears to be steaming along, notwithstanding heightened fears.”

No rate cut expected
Fed Chairman Alan Greenspan’s congressional testimony made only a brief reference to the economic outlook, but economists consider it extremely unlikely the central bank will cut rates at the upcoming Sept. 24 meeting of policy-makers.

With the Fed’s benchmark overnight rate at a 40-year low of 1.75 percent, the central bank has only a limited amount of monetary ammunition left and no doubt will want to reserve in case of an unexpected shock, such as a major terrorist attack, or a sharp deterioration in economic data.

“I don’t think they will move because, there is plenty of money in the system,” Hoffman said. “They have been accommodative.”

But Friday’s report showing that wholesale prices were unchanged in August underscores that inflation is still no threat, even if energy prices are rising, largely on war fears. And with inflation still out of the picture, Hoffman and others expect the Fed to maintain its formal policy outlook, which emphasizes that economic weakness is the central banks greatest concern right now.

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