Economy Showing Signs of Slowing as Retail Sales Decline

WASHINGTON — Americans curbed their spending in May and pushed retail sales down for the second month in a row, new evidence that rising interest rates are beginning to slow the economy.

Sales at retail stores nationwide fell 0.3% to a seasonally adjusted $266 billion last month, the first back-to-back declines since July and August 1998, the Commerce Department reported Tuesday.

That surprised many economists, who were predicting that retail sales would increase a little in May.

After a steady string of robust gains, retail sales fell 0.6% in April, much weaker than the government estimated. It also marked the first decline of the year.

“After a spending splurge that seemed almost endless, consumers are reducing their spending. . . . No doubt that’s some reaction to the rise in interest rates and the drop in the stock market over the same couple of months,” said Stuart Hoffman, chief economist at PNC Financial Services Group.

In May, Americans cut back the most on purchases of building and garden supplies and new cars and trucks. They also trimmed spending for groceries and ate out less.

The Federal Reserve has bumped up short-term interest rates six times since last June to slow the speeding economy and its main engine, consumer spending, which accounts for two-thirds of all economic activity.

Those rate increases are designed to make borrowing more expensive, which cools demand for big-ticket items, such as cars and homes, and keeps inflation from escalating.

Tuesday’s report, along with other recent economic data, including home sales, factory orders and unemployment, suggest that the Fed’s rate increases are beginning to bear fruit and slow the economy.

Economists have been divided over whether the central bank will boost rates for a seventh time when it meets June 27-28. After Tuesday’s report, however, more said the odds are greater that the Fed will stay on the sidelines.

“I think this is what the Fed had hoped for--moderation,” said Michael Niemira, economist with Bank of Tokyo-Mitsubishi. “The events at hand probably will keep the Fed on hold at the next meeting.”

Fed Chairman Alan Greenspan, in a speech to the New York Assn. for Business Economics, didn’t provide a hint Tuesday of what the Fed will do regarding interest rates.

Greenspan said that a significant rebound in American productivity, a key to economic vitality, has occurred in recent years, and that much of the improvement was due to basic changes in the economy, rather than temporary factors that could disappear.

Economists, meanwhile, didn’t believe the slowing in retail sales and in some other sectors is a threat to the nation’s record-breaking economy, now in its longest-ever streak of uninterrupted growth.

The Fed wants to slow the economy to a pace it regards as more likely to be sustained without sparking inflation--a growth rate between 3.5% and 4%. In the first quarter, the economy grew at a 5.4% rate.

In May, sales at hardware, building and garden supply stores fell 1.6%, while sales at furniture stores declined 0.3%. Analysts predicted sales of these items would fall as the housing market cooled.

Sales of new cars and trucks fell 1.3% but still were running at healthy levels. Excluding the volatile autos category, retail sales were unchanged, weaker than the 0.4% gain many analysts were expecting.

Sales at grocery stores and at bars and restaurants fell by 0.5%.

Consumers did spend on other things last month: sales at drugstores and department and clothing stores were up, as were sales at gasoline stations, reflecting higher prices at the pump.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Retail Sales

In billions of dollars, seasonally adjusted:May:

$266 billionSource: Commerce Department