The Spring Economy Is Still Thawing Out From The Blizzard

The March blizzard may be a distant memory, especially with the approach of Memorial Day weekend and the start of summer. But even as Americans swap their snowsuits for swimsuits, the economic data are still showing the aftereffects of the storm.

That's especially true for inventories. The Commerce Dept.'s latest report shows that weather-related drops in retail sales and homebuilding caused business inventories to swell by 0.8% in March, the biggest gain in nearly four years. Because stores were closed during the blizzard, retail stockpiles ballooned by 1.5% in March, and the ratio of inventories to sales in retailing jumped to 1.61--the highest in more than two years (chart).

The worry is that the inventory overhang at the end of last quarter will depress orders and output this quarter. Those extra goods did cause production cuts and fewer bookings at some factories in April. But the bounce-back in the April reports for retail sales, housing starts, and manufacturing output suggests that whatever inventory problem arose in March was quickly dispatched in April and May. That should clear the way for further output gains in coming months.

Some of the most encouraging news for the second quarter comes from retailers and homebuilders. Retail sales rebounded by a strong 1.2% in April, more than offsetting the 0.8% drop in March. Car dealers and department stores--where the inventory buildup was particularly great--increased their sales sharply in April, and receipts at gasoline stations and apparel and building-supply stores also were higher. After adjusting for inflation, real retail sales started the second quarter about even with their first-quarter average.

The initial data for May suggest further spending gains. Sales of domestically made vehicles looked healthy in early May, and department store sales for the first two weeks of the month were running 1.2% above their April average, according to the Johnson Redbook Report, providing more evidence that the sales weakness in February and March was mainly due to the weather.

In addition, the resurgence in homebuilding presages busier times for retailers selling home-related goods and for the manufacturers who make them. After a weather-beset dip of 3.6% in March, housing starts bounced back by 6.7% in April, to an annual rate of 1.21 million (chart). Starts should continue to climb into the summer. That's because housing demand remains high, while the supply of unsold new homes is at a 20-year low.

Certainly, builders and house-hunters alike are watching the latest rumblings in the bond market, caused by indigestion from April's hot inflation numbers. Both the total consumer price index and the core index, which excludes food and energy, rose by 0.4% last month. The gains were the third larger-than-expected rise this year. So far in 1993, CPI inflation is running at an annual rate of 4.3%, and the core rate is 4.5%, raising speculation about the Federal Reserve's next policy move.

The April CPI advance, coming one day after a 0.6% spike in producer prices, jarred the bond market. After the CPI figures were reported on May 13, the yield on the 30-year Treasury bond closed at 6.93%, up from 6.81% two days earlier. Yields drifted even higher, hitting 7.02% on May 18, before retreating.

The sell-off in the bond market means mortgage rates will rise, but that may not curtail the housing rebound. The average 30-year fixed mortgage rate stood at 7.48% on May 14, but HSH Associates reports that some lenders have subsequently lifted their rate to 7.53%. Still, that is far below the 8.9% rate of a year ago.

Moreover, inflation is not the threat that those scary-looking indexes suggest. If monthly CPI gains average 0.2% through yearend, which is easily possible, 1993 inflation will come in at 3%, following 2.9% for 1992. Modest growth in demand, combined with slower growth of unit labor costs, argues against any sustained speedup in inflation. So the price indexes--and long-term rates--should settle back down.

Although mortgage rates matter, jobs and incomes may be more important factors for the housing outlook right now. Because hiring and income growth are steadily improving, households feel there are fewer obstacles to buying a house today than in 1992, according to a survey done by the Federal National Mortgage Assn.

The Fannie Mae report also shows a sharp decline in the percentage of households that worry about their income being too small or their jobs too insecure to buy a house. As long as employment and incomes continue to rise, demand for housing is unlikely to falter.

The spring rebound in homebuilding will pump new life into the production of construction materials, which was another casualty of the weather. Also, the stronger housing market will lift sales and output of furnishings, appliances, and other home-related goods.

Further gains in consumer spending are important because the latest data on industrial production illustrate the damage a dearth of shoppers can do. In April, manufacturing output rose a solid 0.4%, after a slim 0.1% gain in March. The strength, however, is coming from business-equipment makers, who boosted production by 0.8% in both March and April. Consumer-goods output slipped by 0.1% in March and a further 0.2% in April (chart). The storm-related buildup in store inventories most likely caused the cutbacks.

But even with that bit of sluggishness, the industrial sector shows few signs of slumping again. Overall industrial production rose by 0.1% in April, but it was depressed by a weather-related 3.6% drop in utility output. Moreover, the April operating rate for all industry was unchanged from March's 81.4%, and the Federal Reserve's revisions to capacity show that industry is using 1.5% more capacity than was first thought.

One area where U.S. manufacturers face problems, though, is foreign trade. Recessions in Continental Europe and Japan still hamper exports, while imports are grabbing a disturbingly large share of U.S. markets. That trend continued in March. The merchandise trade deficit ballooned to $10.2 billion, an increase from February's figure of $7.9 billion. That was the largest monthly gap in four years, and it is likely to cause a downward revision in the 1.8% growth of first-quarter gross domestic product.

That shocking deterioration was caused by imports, which jumped 9.7%, to $49.2 billion. The gain was broad, but imports of consumer goods were particularly strong. Like their American cousins, however, many of these foreign goods ended up in inventory in March, suggesting that imports will fall back in the next few months.

The U.S. addiction to imports, which lay dormant during the recession, seems to be roaring back. In the first quarter, price-adjusted imports were up 13.4% from a year ago, while exports rose by a smaller 4.9% (chart). America's import growth has not outpaced its export growth since the mid-1980s.

Of course, not all the news on the trade front is bad: Exports grew by 5.6% in March, to $39 billion. That's just a shade below their record of $39.2 billion posted in December. Growing demand from developing countries is offsetting some of the sting from recessions in the industrialized nations. Moreover, exports to Britain, the fourth-largest market for U.S. goods, are starting to turn around, now that its economy is recovering.

To be sure, the continuing inventory adjustment means that manufacturers are unlikely to repeat their robust performance of the first quarter. But last month's combination of strong retail sales and sluggish output of consumer goods suggests that retailers already have corrected some of their inventory surplus. And with housing and consumer spending still advancing, goods-producers should post steady, if modest, gains into the summer.

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