Consumers Could Turn Slowdown into Rebound

WASHINGTON _ In seeking rescuers for the slowing U.S. economy, the American people need look no further than themselves.

"The thing that will right the economy is a strength in consumer demand again," said Robert "Tim" McGee, chief economist at Tokai Bank in New York.

Whether U.S. consumers are actually fueling a rebound by increasing their purchases should become clearer tomorrow, when two government reports are likely to show that retail sales increased in May while inflation remained subdued.

Consumers may be buying again. Chain stores reported stronger sales of home furnishings and clothing late in the month, meeting their sales goals, the Johnson Redbook Service reported on May 30.

"There's a view that the economy is coming back in the consumer sector," McGee said.

Overall, retail sales probably rose 0.6 percent last month after declining 0.4 percent in April, according to analysts surveyed by Bloomberg Business News. Meanwhile, consumer inflation probably remained under control, posting a 0.3 percent increase during May, analysts said.

Buyers aren't going wild, however. Auto sales, for example, remain weak as manufacturers trimmed their production targets.

Tomorrow's sales report "will tell us what's going on in the consumer's mind," said Mark Vitner, an economist with First Union in Charlotte, N.C. It will tell whether the current slowdown "is a pause or something more serious."

The retail sales figures are especially important because consumer spending accounts for two-thirds of U.S. economic activity.

"If sales are flat or down again in the month of May, folks looking for an economic slump will see their case bolstered," Vitner said.

The nation is looking at an economy that slowed to a 2.7 percent annual growth rate in the first three months of the year from a 5.1 percent rate in the final quarter of last year.

One reason for the slowdown is the Federal Reserve's seven interest-rate increases since Feb. 4, 1994. Fed policymakers pushed the federal funds rate on overnight loans among banks to 6 percent from 3 percent in that time.

Some analysts worry the Fed may have gone too far, slowing the economy beyond the ideal "soft landing" from strong growth and leaving it on the brink of recession. As evidence, they point to the 108,000 jobs the economy unexpectedly shed during April and May.

The economic sluggishness is perhaps more pronounced than many people anticipated, Treasury Secretary Robert Rubin said Monday.

Even Alan Greenspan, chairman of the Fed board that helped engineer the current slowdown, said over the weekend that chances of a "mild recession" have increased.

Still, Rubin and many Fed policymakers say the economy will rebound later in the year.

"The most likely scenario going forward is a soft landing" with solid growth and low inflation, Rubin said in a radio call-in show on WAMU-FM in Washington.

The slowdown has raised expectations among some investors that the Fed's next move will be to cut interest rates, perhaps as soon as its July 5 and 6. Those expectations have dwindled as some Fed officials have predicted a rebound in the next few months.

That's one reason bonds were little changed today, yielding 6.72 percent, unchanged from Friday. The dollar was down against the yen and the deutsche mark in midday trading.

Though some analysts are calling for an economic rebound, the slowing economy has made businesses reluctant to raise their prices, reducing the threat of inflation.

"Most retailers are reporting that price competition is fairly intense," said First Union's Vitner. "Inflation is pretty well under control."

The government reported last week that inflation at the producer level was unchanged during May as prices for beef, poultry, vegetables, and gasoline declined.

"There's been no food inflation at all," said Don Vaillancourt, vice-president for communications at Grand Union Co. in Wayne, N.J. "We expect a moderate amount of food inflation through the end of the year, but no more than one percent."

Analysts said the consumer price index core rate, which excludes food and energy prices, also probably rose 0.3 percent in May.

For the first four months of this year, consumer price inflation was running at a 3.6 percent annual rate compared with 2.3 percent in the first four months of 1994. For all of 1994, the CPI rose 2.7 percent, the same as all of 1993.

Retail gasoline prices likely rose last month, however. And service costs, which make up about 55 percent of the CPI, continue to rise.

Meanwhile, the government said today that profits at U.S. manufacturers showed little change in the first quarter, as the economy slowed. After-tax factory profits in the first three months of the year totaled 6.1 cents per dollar of sales, the same as in the fourth quarter, the Commerce Department said.

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