Slow ... Slower ...Oorph

LOS ANGELES -- We

pointed out even before the April

retail sales number hit a month ago that consumption would turn in a below-average performance during the second quarter.

That's precisely the way the spending thing's playing out.

The May retail numbers

released this morning --alongside revisions to April data and a conservative assumption for June -- suggest that the second-quarter sales increase will clock in at about 8.3% on a year-over-year basis (see the chart on our

data page).

That's 4 percentage points slower than the first-quarter figure, which went down as the most impressive performance of the cycle.

It's also 2 percentage points faster than the average increase we've seen since 1996.

And there you have the whole slowdown thing summed up nicely. Yes ... the numbers are smaller. Yet are they small enough ... and will they persist?

Central bankers are

pointing out that "it's too soon to tell" if the slowing will be sustained. And well, yeah ... I guess

so

!! The economy, and especially the tireless American consumer driving it, have done nothing but surprise on the upside for four years running, and it's made policymakers look positively stupid in the process. Have we forgotten this May 1998

nugget?

The staff forecast prepared for this meeting indicated that the expansion of economic activity would slow considerably during the next few quarters and remain moderate in 1999.

No. We haven't. And neither have they. Your correspondent guesses that these guys are so sick of being burned that they won't now issue such statements in the absence of some seriously slow numbers that stick around for months. One step further, something from the

Market News

Fed

watcher, who's lately been dead-on, yesterday caught your narrator's eye.

And there's the issue of how much slowing is enough. A Fed consensus has emerged that the economy's growth trend or potential is considerably higher (and nonaccelerating inflation rate of unemployment considerably lower) than it used to be. However, real growth has been exceeding even this higher potential by a wide margin, officials note, and some think growth needs to slow not just to trend but to below trend to avoid accelerating inflation.

We like this because we wrote something similar (expressed in terms of trend and x) at the beginning of the month. And because it fits nicely with this great McCulley

piece and this great Meyer

piece (at least read the conclusion).

And because it provides a kind of guide.

A super-strong sales pace that slows to something materially north of trend still has a long way to go.

Side Dish

(a) The

Economic Trends

publication from the

Cleveland Fed is always worth a read. The first

portion of the June

issue got some attention yesterday.

(b) Watch the

Beige Book to be released tomorrow. The last

one noted that "employment costs remained under pressure and appeared to intensify in the last two months." A similarly strong (or even stronger) statement this time works against the favorable earnings news we saw in the May employment report; a kinder one supports it.

(c) Bank lending is rocking. The

pace at which it's grown has now accelerated for seven straight months -- to 10.3% (on a year-over-year basis) as of May, from 3.4% in October 1999. The May showing goes down as the strongest in more than four years.

Tighter financial conditions indeed!!