Retail Sales Drop Anew

Updated from 9:11 a.m. EDT

Retail sales in the U.S. continued to slump in May for the second straight month, the government reported Tuesday, providing another sign that America's hot economy may finally be starting to cool.

Combined with a slowing housing market, declining durable goods orders, a moderation in manufacturing, and Friday's unchanged Producer Price Index report, the retail numbers point to a more benign inflationary picture.

Even so, the Federal Reserve will likely require evidence that the strong labor market is easing before it refrains from a further tightening of monetary policy.

One member of the Federal Open Market Committee, which sets U.S. monetary policy, disclosed that he was heartened by the retail sales report in light of other reported data. Answering questions after giving a speech at the College of St. Rose, William McDonough, the vice chairman of the FOMC and the president of the Federal Reserve Bank of New York, said, "Is [a] slowdown beginning to be visible? There are a number of variables that would tell you yes."

The decline in retail sales came as a drop in the purchase of automobiles and other large items indicated that the once-frenetic pace of demand is abating.

Retail sales fell 0.3% overall in May from the month before, following April sales that were revised downward to a tumble of 0.6% from a slide of 0.2%, according to figures released Tuesday by the Commerce Department. Excluding automobiles, retail sales were unchanged.

Expectations were for a rise of 0.1% for the overall number and a jump of 0.4% excluding autos, according to a Thomson Global forecast.

Auto sales were down 1.3%, after falling 1.2% in April, revised from an earlier 0.7% dip. Durable goods decreased 1% from April, with building material sales down 1.6% and furniture sales down 0.3%.

Alan Greenspan, the Fed's chairman, characteristically kept his own counsel Tuesday when it came to opinions on an economic slowdown or what actions the Fed may take at its meeting on June 27 and 28.

However, he did say that there is more evidence of expanding U.S. productivity and that gains seen recently in worker output are largely irreversible.

"Cutting through the inevitable cyclical fluctuation of measured output per hour, the evidence of a decided improvement in the growth rate of structural productivity from the macro data has continued to strengthen," Greenspan said in a speech to the New York Association for Business Economics.

He continued, "Most of the gains in the level and the growth rate of productivity in the United States since 1995 appear to have been structural, largely driven by irreversible advances in technology and its application."

Last week, the Labor Department announced that there was no revision to the 2.4% increase in nonfarm productivity -- a measure of the output per hour of workers outside the farm sector -- in the first quarter. The increase followed the revised 6.9% pace in the fourth quarter of 1999.

The sharp turn in retail sales figures can be ascribed to the Fed's policy of raising interest rates. "The Fed wanted to slow consumer spending," said Frazier Evans, an economist at Liberty Financial. "This is the first time they can say they've had some measure of success."

The Fed has raised short-term interest rates, which act as a basis for everything from credit cards to mortgages, six times since last June in an attempt to slow economic growth. Its last rate move, on May 16, doubled in magnitude from the previous five, to half a percentage point.

The decline in retail sales in May could reinforce the view of some economists that the Federal Reserve's recipe of short-term interest rate increases is working and that a further increase during the Fed policymakers meeting in late June will be unnecessary.

"This probably adds to the argument for why the Fed should keep policy steady at the end of the month," said Carol Stone, an economist with Nomura Securities. However, she cautioned that the numbers in April and May are being compared with consumer spending numbers that had been very strong. She also warned that large income tax payments in April may have restrained demand.

Stone said that the Fed will reassess the wisdom of a rate increase during its August meeting. At that time, "they will have another couple months' worth of data to decide whether this is a sustained trend or a temporary pause," Stone said.

Evans disagreed, saying that the Fed will raise short-term interest rates by another 25 basis points at the end of this month: "The data is still over a relatively short period of time and without a doubt the Consumer Price Index will show some quickening in inflation." CPI figures for May will be released on Wednesday.

He added that labor costs are still of major concern. After all, the employment cost index, a measure of growth in wages and benefits for U.S. workers, grew at a larger-than-expected 1.4% pace in the first quarter, the fastest rate since 1990.

The jobless rate jump to 4.1% in May slightly offset concerns over the strong labor market, but it is considered too early to tell. The Fed will meet at the end of June without seeing the June employment report, which is due on July 7.