Smith Faculty Opinion Article	March 14, 2007
By Dr. Peter Morici, Professor of International Business E-MAIL WEB SITE

February Retail Sales Up 0.1 Percent

Today, the Commerce Department reported February retail sales were up 0.1 percent from January. Less automobiles and parts, retail sales fell 0.1 percent. The consensus forecasts were for increases of 0.3 percent for both numbers.

Compared to a year ago, January retail sales were up 3.2 percent, and excluding automobiles and parts, retail sales increased 3.1 percent.

This sluggish growth indicates the economy continued to consolidate during February, and first quarter GDP growth is more likely to come in at less that the 2.5 percent forecasters had predicted.

Cold February weather, snow and ice considerably discouraged shoppers. Along with moderate February jobs growth, this tepid advance in retail sales indicates the economy has not lost its footing, but only modest growth may be anticipated for the first quarter.

At this juncture the likelihood of a recession in 2007 is only one in three, and the Federal Reserve is not likely to change interest rate policy before its August meeting.

After Wall Street has an opportunity to digest todays news, prospects for stable interest rates should help firm up stock prices.

Gasoline Prices and Retail Sales

In February, the average retail price of gasoline was up 5 cents or about 1.5 percent, and this had a modest impact on sales in other sectors. Non-gasoline purchases were virtually unchanged, and retail sales, less gasoline and autos, were down 0.3 percent.

Gasoline prices are rising dramatically higher in March and this is likely to continue through April, but the impact of higher fuel prices on sales of large SUV and truck sales is likely to be modest. Gasoline prices were much higher last summer, and that surge had a lasting effect on car buyers expectations. The dip in fuel prices from September through January did not do much to revive interest in large vehicles.

With February cold weather driving up crude oil prices and driving down gasoline inventories, higher gasoline prices were already built into consumers expectations and car buying habits. In the Kings English, General Motors and Ford face a chilly spring and tough summer markets. Thankfully, Toyota and other Asian nameplates are making more of what they sell in the United States.

Auto, Housing and Stock Prices

Although the housing market has softened since last summer, home prices are still up about 55 percent over the last five years. As importantly, the pace of existing home sales remains robust indicating homeowners enjoy considerable liquidity. This dramatically sets apart the current situation from the housing crisis of the early 1990s.

While homeowners may not expect much appreciation over the next year or so and values will fall in some cities and communities, homeowners still have a lot of untapped equity to finance additional spending. The reservoir of wealth created by the housing boom has not evaporated, and much of it is yet to be spent.

Losses in the sub prime lending will most affect firms that specialize in brokering these loans, but most sub prime borrowers can be transitioned into conventional mortgages. The broader impact of defaults will be modest and widely dispersed across capital markets. Needed changes in lending standards will not prove too discomforting.

The resiliency of the mortgage financing sector has dramatically improved since the Savings and Loan Crisis. Adequate access to mortgage financing will remain available to sustain the resale market and finance a recovery in new home construction later this year.

Overall, housing values are providing consumers with ballast as the economy and jobs grow more slowly.

Stock prices are still up about 11 percent since August, and this has compensated for falling home equities on household balance sheets.

The realization that housing prices are moderating but not collapsing, enduring real estate liquidity and a buoyant stock market should keep consumers spending through 2007, albeit growing at a more moderate pace than in recent years.

In 2007, retail sales should advance at a 5 to 6 percent pace, and support GDP growth in the range of about 2.5 percent. The Federal Reserve should not raise interest rates, and the outlook for stock prices remains strong, as profits continue to grow, especially among firms with significant overseas operations.

Supported by decent retail sales and overseas profits, stock prices should continue to rise.

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