June 14, 2002

Sales Sold Off

The Commerce Department reported on June 13th, that retail sales in May declined by 0.9% - nearly a full percentage point - led by a 2.5% drop in automobile/parts sales and a 3.1% drop in gasoline sales. May's decline in retail sales was the largest monthly decline since November 2001, and surprised many "nearsighted" economists who have been projecting a strong recovery in the second half since the spring of 2001. Employment and disposable personal income, and their impact on the economy appears to be coming to the attention of many economists on Wall Street and the CNBC personalities as the prime catalyst underpinning the health of the retail consumer. However, job prospects remain weak for many, including new graduates, in a changing (and struggling) economy. Consumer spending accounts for approximately two-thirds of economic activity.

Surprising many analysts once again, the Labor Department reported that wholesale prices as measured by the producer price index (PPI) dropped 0.4% in May, following a 0.2% decline in April. Economists had been expecting a slight 0.1% increase in the index.

Under existing conditions, many economists (and we do concur with them on this point) are projecting that the Federal Reserve will leave short-term interest rates unchanged at its June meeting, given the weakening of economic activity as reflected in recent reports.