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Economic reports hint at a soft spot

A report of surprisingly weak retail sales in March were seen by some analysts as evidence of an oil-induced economic soft spot and helped send stock prices down sharply for the week to their lowest levels of the year.
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This week’s report of a surprisingly sharp slowdown in retail sales is being viewed by some analysts as evidence that the economy is slipping into another energy-induced “soft patch,” much like last year.

While some economists say a bit of a slowdown might not be such a bad thing, investors got a case of the jitters as little daggers of data chipped away at the image of an economy in full-throated recovery.

Major stock indexes fell a sharp 4 percent in three sessions after the retail sales report was released, dropping to their lowest levels in five months. In one particularly bearish signal for the stock market, nearly 300 major stocks were trading at new 52-week lows late in the week, compared with only about 50 pressing ahead to new highs, Reuters reported.

Retail sales rose 0.3 percent in March, but that was far less than the 0.6 percent that economists expected. The raw number was even weaker than it appeared, economists said. Excluding gasoline, autos and building materials, retail sales fell 0.3 percent from the month before, the first such decline in nearly a year, said David Rosenberg, chief North American economist for Merrill Lynch. Sales fell at department stores, restaurants, clothing stores and electronics dealers last month.

While a single month is hardly confirmation of slowdown in growth, many economists said it was natural to conclude that higher gasoline prices are beginning to bite into consumer spending.

“I think the economy is adjusting to the higher energy prices,” said Mark Zandi, chief economist for, a forecasting firm. “Lower-income consumers in particular are starting to have to make some choices.”

Consumer and business sentiment seems to be faltering. The University of Michigan’s consumer sentiment index fell for a fourth straight month to its lowest level since September 2003. A survey of small-business optimism has fallen for three straight months, also to its lowest level since 2003.

The International Monetary Fund cautioned this week that high energy prices would weigh on global growth this year.  Friday’s report that factory production edged down 0.1 percent just added to the uncertainty.

Gas prices, which currently average about $2.28 a gallon nationwide, are up 49 percent from year-ago levels, although crude oil prices have climbed down from the recent  record levels. Still, with refineries running near full capacity in advance of the summer driving season, it would not take much to send gas prices soaring even higher, said Larry Horwitz, senior economist at Decision Economics.

“All it takes is one accident or one refinery taken out, and you will see price spikes,” he said.

Because consumer spending drives more than two-thirds of economic activity, the March shortfall in retail sales forced economists to cut back their estimates of first-quarter economic growth by about 0.5 percent. And economists are standing by their forecasts for a further slowdown in growth in the second half of the year and into 2006, as a long cycle of Federal Reserve interest rate hikes begins to hold back activity.

Horwitz is looking for real, inflation-adjusted growth of 3.6 percent this year and 3 percent next year after last year’s 4.4 percent.

“We started this year with the expectation that oil prices were going to come down, and that was going to be a big positive for consumer spending,” said Scott Brown, chief economist for Raymond James. “Obviously that is going out the window. Oil at this point is a restraint — it’s not going to send the economy into recession, but the mood at this point is pretty sour.”

Jay Feldman, senior economist at Credit Suisse First Boston, was a bit more sanguine, although he downgraded his growth expectations this week. High gas prices are “not something that is going to derail the expansion,” he said. “Corporations have so much cash right now — the outlook for business investment and hiring is pretty solid.”

Or at least for business investment. On hiring, there is a bit more uncertainty. Last month’s disappointing employment figures were the latest reminder that job growth is likely to remain modest, largely because of persistently strong productivity growth and the high cost of health care.

Although a slowdown in consumer spending might hurt the nation’s vast retail sector, it might not be such a bad thing for the overall economy, some analysts said.

“If it’s modest enough, if it’s something like last year, which was temporary enough,  then it does take away the demand-side worries of the Fed,” said Larry Horwitz, senior economist at Decision Economics. “If you slow down demand, then the inflation pressures will diminish.”

He and some others argue that an energy-induced slowdown would ease central bankers’ inflation fears, allowing them to continue raising short-term rates at a more modest pace, as they have been doing since last June.

“If the economy gets a break in terms of some softening like happened last year, it could hold interest rates down,” said Srinivas Thiruvadanthai. Last year’s economic soft patch help keep the hot housing market going, he said.

Long-term interest rates, which resisted the Fed’s rate-hiking efforts, have taken another downturn in recent weeks, sending average long-term mortgage rates back down below 6 percent. But Thiruvadanthai notes that with so many homeowners relying on adjustable-rate mortgages and home equity loans, Fed rates have a far more powerful impact on the housing market than they did a decade ago.