ECON - Consumer confidence grows

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By Caroline E. Mayer
Washington Post Staff Writer
Friday, May 11, 2001; 1:08 PM

Better-than-expected economic numbers released today showed that consumers have not yet given up on the U.S. economy. The government reported that consumers spent more in April than many economists had predicted, while the consumer sentiment gauge of the University of Michigan indicated that consumers are feeling better about the economy than they did last month.

The Commerce Department said that retail sales rose by 0.8 percent in April from the previous month, to $275.5 billion. Part of the steeper-than-expected increase was due to a revision of March sales, which dropped by 0.4 percent from February instead of the 0.2 percent decline originally reported.

Even so, Americans were buying more than expected; analysts had predicted sales would rise to $274.4 billion in April. Excluding automobiles, sales rose 0.7 percent after falling a revised 0.4 percent in March.

The University of Michigan, meanwhile, said its consumer sentiment gauge rose in early May to 92.6 from 88.4 in April.

The monthly retail sales report showed the first monthly increase since January, and coming with the improved outlook in consumer sentiment was welcome news to economists, who have been closely monitoring consumer spending for signs of a possible recession.

"The numbers suggest that consumer spending will hold up," said Chris Varvares, president of Macroeconomic Advisers. "This is all a game of probabilities, but certainly this significantly reduces the risk that the economy will falter in the second quarter."

Nonetheless, the major markets were all down following the reports as the data increased fears that the Federal Reserve Board will be less aggressive in cutting interest rates at its Tuesday meeting. Some economists and Fed watchers are saying that a quarter percentage point cut is now more likely than a half-point cut. The Federal Reserve has cut interest rates four times this year, each time by half a point.

Economists were particularly surprised by the improved consumer outlook, given the steep rise in unemployment numbers released last week. But the university's survey found that increase "had no immediate impact on consumers . . . the improvement reflected a renewed economic strength due to the repeated cuts in interest rates. Clearly many consumers now believe the worst is over."

Consumers felt better about both their current economic conditions and their future, with sentiment about current conditions rising from 98 last month to 102.1 in early May. But that's still below the numbers recorded the first three months of the year.

Sentiment about future expectations rose to 86.5 from 82.2 in April.

Based on these numbers and retail sales, Sung Won Sohn, chief economist for Wells Fargo & Co., said earlier pessimism "was overdone. I don't think the economy will go into a recession, but we're not out of the woods yet. The economy still remains fairly soft – which is why we believe the [Federal Reserve Board] will purchase ample insurance" and reduce interest rates when policy makers meet next week. That prediction was made by many other economists today as well.

The government also reported today that producer prices for finished goods rose 0.3 percent in April, the largest increase in three months, led by a surge in gasoline prices, which surged 7 percent. It was the largest increase in gasoline prices since June 2000.

Food prices rose 0.6 percent in April, after rising 1.1 percent in March.

And for the first time since September 1994, prices for computers rose – by 1.5 percent over the previous month, the largest gain since a 0.7 percent increase in September 1993. But that gain followed a larger than normal decline of 5.9 percent in March.

© 2001 The Washington Post

-- Anonymous, May 11, 2001


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