Spring retail sales are lackluster
Retail sales fell 0.2 percent in March after a slight dip in February. The March drop was exacerbated by a decline in sales at auto dealerships. However, nonauto retail sales edged down 0.1 percent in March after a 0.2 percent drop in February. Given the 1.3 percent spurt in January, perhaps one shouldn't be surprised at the pullback in February and March. Declines were concentrated in the durable goods: building materials stores, auto dealers, and furniture and appliance stores. Sales at nondurable goods stores didn't fare as badly after taking into account that gasoline station sales fell 2 percent, partly reflecting a drop in gasoline prices during the month. Department store sales edged up modestly and so did spending at restaurants. However, apparel store sales decreased, as did food store sales.

In looking at the chart above, there is no question that consumer spending tapered off after the first quarter of 2000. Retail sales didn't fall apart entirely - after all, consumers continue to spend as long as they earn income. But the trend shifted into lower gear in mid-2000, and that lower path is the one we are following right now. After considering that consumer confidence has dropped sharply in the past six months, one shouldn't be so surprised that consumer spending has moderated at the same time.

Preliminary figures for mid-April show that the University of Michigan's consumer sentiment index fell 3.7 percentage points to 87.8. This is the lowest level since November 1993, although some months in 1995 and 1996 were nearly as low. On the whole, consumer confidence was much lower during the 1990-91 recession as well as the first year of recovery. However, it is noteworthy that the level of confidence has decreased so precipitously the past few months. Two key factors that impact confidence are jobs and inflation. Apart from the run-up in energy prices, inflation has remained under control and the job outlook has remained relatively healthy until the past month or so. It is possible that the sharp deterioration in the stock market has shaken consumer confidence, but the Nasdaq peaked over a year ago and confidence remained pretty high until December. Perhaps consumers weren't really paying attention to their portfolios and got "sticker" shock at the end of the year.

Jobless claims shoot up
New jobless claims gained 9,000 in the week ended April 7 to 392,000. Perhaps, the monthly average will settle down a bit, but there is no question that the level of jobless claims bottomed out about a year ago. The chart below shows that jobless claims have headed higher over the past twelve months at the same time that the Conference Board's help wanted index has shifted sharply lower.

This deterioration in the labor market may help to explain why consumer confidence has deteriorated lately. It also helps to explain the weaker pace of retail spending.

PPI comes in with expectations
The producer price index edged down 0.1 percent in March, reversing the February gain. This still put the average gain near 0.4 percent per month in the first quarter because of the 1.1 percent jump in January. In any case, the yearly rise in the PPI is clearly improving, as indicated in the chart below. Excluding the volatile food and energy components, the PPI inched up 0.1 percent in March after declining 0.3 percent in February. Taking into account the January spurt (0.7 percent) in the core PPI, the average gain is still less than 0.2 percent per month. The yearly rise is in line with the trend of the past year.

Economists and market participants also like to look at the path of the intermediate and crude materials indices. Both are showing signs of improvement. The intermediate goods index fell 0.2 percent in March after a 0.1 percent drop in February; the crude materials index declined 1.7 percent in March after a 14.2 percent plunge in February. Energy prices are clearly affecting these two price indices. Excluding the volatile food and energy components, the intermediate goods index is up 1 percent from a year ago, while the crude materials index is down 10.8 percent. The price stability at these earlier stages of processing suggests that there aren't inflationary forces in the pipeline to pressure finished goods prices. On the whole, these figures should not be extremely worrisome for Fed officials. In any case, they shouldn't prevent the Fed from easing credit conditions as the economy weakens further.