Smith Faculty Opinion Article	November 15, 2006
By Dr. Peter Morici, Professor of International Business E-MAIL WEB SITE

Retail Sales, Wholesale Prices Indicates Moderate Growth, Cooling Inflation

Retail sales and wholesale price data released today indicate the economy is headed for a soft landing. Economic growth is moderating, and inflation appears to be subsiding.

The Federal Reserve is likely to leave interest rates unchanged until the balance of risks between recession and inflation become clearer.

Yet to be reported October consumer prices and household savings data, and November employment figures, will better clarify the balance of risks between recession and inflation before the Open Market Committee meets to set interest rates on December 12.

Retail Sales
Today, the Commerce Department reported October retail sales decreased 0.2 percent from September, and retail sales, less automobiles and parts, were down 0.4 percent. Compared to a year ago, October retail sales were up 4.5 percent, and excluding automobiles and parts, retail sales increased 3.1 percent.

These aggregate data hide other, more fundamental information. In October, gasoline prices fell 12 percent, and lower prices dragged down the value of gasoline station sales, which are included in aggregate retail sales.

Excluding gasoline, retail sales jumped 0.4 percent, and excluding automotive products and gasoline, retail sales rose 0.3 percent. That is a good showing and bodes well for the holiday season. The overall effects of lower gasoline prices on consumer behavior lags a month or two, and November promises to be a better month.

Fourth quarter GDP growth promises to be stronger than was reported for third quarter growth, and rising profits will sustain the stock market rally.

Producer Prices
The Labor Department reported producer prices fell 1.6 percent in October, thanks to energy prices falling 5.0 percent and food prices dropping 0.8 percent.

More importantly, producer prices, less the volatile energy and food sectors, fell 0.9 percent, after rising 0.6 percent in September and falling 0.4 percent in August. Since October 2005, this measure of core inflation has risen only 0.6 percent. However, this moderation in wholesale prices has yet to be seen in consumer prices.

On Thursday, the Labor Department will release consumer price inflation data for October, and that will give a better indication of the inflation pressures the Federal Reserve must confront as it continues to forge interest rate policy in a turbulent and uncertain period for the national economy.

For the time being, Wall Street has reason to be optimistic.

If the newly elected Democratic Congress exercises reasonable restraint on spending and the regulation of business, 2007 should prove a very good year for the stock market.

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.