US economy still vulnerable as retail sales fall

Published by rudy Date posted on April 16, 2009

WASHINGTON – The recession is easing? Not so fast. An unexpected drop in sales of just about everything from cars to clothes sent a sobering message Tuesday: The economy is still vulnerable.

That cautionary guidance was seconded by President Barack Obama and Federal Reserve chairman Ben Bernanke, though they had encouraging words as well. Bernanke spoke of “tentative signs” that at least the economy is declining more slowly, and Obama repeated his recent analysis that he sees “glimmers of hope.”

With Americans still losing jobs by the thousands, a major fear is that people will cut back even further on their spending, and that could plunge the economy into a sharper tailspin.

Tuesday’s report that retail sales fell 1.1 percent in March deepened concern.

Improvements in a string of other economic reports over the past few weeks – including home and auto sales, home building and other consumer-spending barometers – had raised optimism that the economy’s descent might be slowing.

Obama and Bernanke cited those improvements in separate speeches Tuesday. But they also made clear the economy is not out of danger and that potential pitfalls lie ahead.

“By no means are we out of the woods just yet,” Obama warned in a speech at Georgetown University. “The severity of this recession will cause more job loss, more foreclosures and more pain before it ends. Credit is still not flowing nearly as easily as it should.”

Bernanke, speaking at Morehouse College in Atlanta, said, “Recently, we have seen tentative signs that the sharp decline in economic activity may be slowing.” But he, too, cautioned that hopes for a lasting recovery hinge on how soon the government succeeds in bolstering the financial markets and stimulating more normal borrowing by consumers and businesses.

“We will not have a sustainable recovery without a stabilization of our financial system and credit markets,” he said.

Both Bernanke and Obama said progress is being made on that front and policymakers will keep working to ease financial and credit stresses.

Historically, the path to any economic recovery isn’t a straight line. It’s often marked by lurches both forward and backward.

“I liken it to a lawnmower engine that hasn’t been started in a while,” said Richard Yamarone, economist at Argus Research Corp. “You’re going to get some sputtering of activity, and you’ll get a couple of false firings as well.”

Yamarone and many other analysts believe the economy in the April-to-June quarter is still declining, perhaps at a rate of 2 to 2.5 percent, but not nearly as much as it had been earlier.

The economy shrank at a 6.3 percent rate in the final three months of 2008, its worst showing in a quarter-century. Some economists estimate it fared about as poorly in the first three months of this year; others estimate a 4 to 5 percent rate of decline. The government will release its initial estimate for first-quarter economic activity at the end of April.

Even in the best-case scenario that the recession ends later this year, the jobless rate, now at a quarter-century high of 8.5 percent, is expected to climb to 10 percent by the year’s end. People either without jobs, or fearful of losing them, tend to drag down consumer spending.

A big drop in auto sales led the March decline in retail sales. Business was way down at clothing stores, appliance outlets and furniture stores, too.

Still, analysts say there’s reason to hope for better times ahead.

Shoppers’ appetites should get a lift from the tax credits of $400 per worker and $800 per couple in the government’s $787 billion economic stimulus package. Most workers in April started seeing a $10 bump in their weekly paychecks. That money will probably help boost retail sales, possibly in April but more likely in May and June.

As for the March sales decline, some analysts didn’t think it was quite as bleak as it looked.

Part of the decrease was simply because prices have fallen, depressing sales totals. And because of the late Easter holiday, which fell in April this year, shoppers probably delayed some of their shopping.

Given such volatility, Frank Badillo, senior economist at consulting group TNS Retail Forward, said he looked only at the combined January-through-March retail sales figures, which were in line with his expectations.

“I don’t see any reason for alarm in these numbers,” Badillo said.

Some analysts said they remain hopeful the economy will actually start to grow again later this year, possibly in the final quarter.

“We are transitioning and zeroing in on a bottom,” said Ken Mayland, president of ClearView Economics. “The first thing for a recovery to occur is that the hemorrhaging has to stop. We are seeing the hemorrhaging substantially slow down.”

But if any renewed credit clog were to form, or if problems in the banking system were to deepen, confidence could be shattered, and the economy could sink into a deep slide again. Another threat would be a collapse of General Motors Corp., which would send many more to the unemployment lines.

Though progress is being made, “it does not mean that hard times are over,” Obama said. “2009 will continue to be a difficult year for America’s economy.”

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