Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: WEDNESDAY, March 15, 1995 TAG: 9503150051
SECTION: BUSINESS PAGE: B8 EDITION: METRO
SOURCE: ASSOCIATED PRESS
DATELINE: WASHINGTON LENGTH: Medium
The first decline in retail sales in nearly a year sent financial markets soaring U.S. trade deficit and focused instead on hopes that interest rates will not be increased again.
The Commerce Department said sales at department stores, auto dealerships and other retail outlets fell an unexpectedly sharp 0.5 percent in February, reflecting widespread weakness in consumer demand.
The report triggered big rallies in bond and stock markets. Analysts credited the market euphoria to a belief that the U.S. economy was slowing from last year's rapid-fire pace to a more sedate level with only moderate inflation.
In a second report, the Commerce Department said the deficit in America's current account, the broadest measurement of foreign trade, ballooned 50 percent last year to $155.67 billion, the second-highest level on record.
While America's trade performance was given much of the blame last week when the dollar was hitting record lows against the German mark and the Japanese yen, the new trade report did not trigger a further slide in the dollar.
Indeed, the dollar actually strengthened Tuesday, and analysts credited the boost that bond and stock markets received from the weak retail sales data.
``The key for the dollar is whether the fundamentals of the U.S. economy are good. We are getting the kind of low inflation and moderate growth environment that markets like to see,'' said Bruce Steinberg, an economist at Merrill Lynch in New York.
Cynthia Latta, an economist at DRI-McGraw Hill Inc., said the markets were correctly interpreting the latest data as putting the Federal Reserve on hold. She said it was likely that the central bank's Feb. 1 rate increase, the seventh in a year, would be the last for a while.
``The retail sales figures tell us that there is a genuine slowdown occurring but that we are not headed into a recession,'' she said.
The 0.5 percent drop in retail sales in February was the first since a 1 percent drop last April. Last month's report showed declines in nearly every category.
Sales of big-ticket items such as autos, furniture, appliances and building materials dropped last month, and department store sales were down 1.1 percent.
Since consumer spending accounts for two-thirds of the overall economy, analysts said the slowdown in demand would sharply lower economic growth in the first quarter. Many predicted the gross domestic product would expand at a rate of 2.5 percent or less, in line with the Fed's goal for a so-called soft landing.
The $155.67 billion deficit in the current account, up from $103.90 billion last year, was the second-worst trade gap on record, topped only by a $167.10 billion shortfall in 1987.
The year ended on an exceptionally weak note, with a trade gap in the October-December quarter of $44.76 billion, an all-time high for a single quarter. However, analysts predicted last year's import surge would slow markedly this year with consumer demand weaker.
The current account is considered the broadest gauge of a country's trade performance; it measures not only trade in goods and services, but investment flows between countries, and foreign aid as well.
For 1994, the United States suffered the first deficit in investment income since the government began keeping the current series of records in 1960. The shortfall of $15.18 billion reflected the fact that the country is now the world's largest debtor nation, with foreigners earning more on their U.S. assets than Americans earn overseas.
While the merchandise deficit hit a record $166.36 billion last year, the one bright spot in the report was a record surplus in services of $59.99 billion, partly reflecting a flood of foreign tourists as the falling dollar made the United States a budget destination.
The other component of the current account is unilateral transfers, such as foreign aid and government pension payments to retirees overseas, which rose to a deficit of $34.12 billion last year.
by CNB