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As Autos Tank, Retail Continues Its Slow Free-Fall

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The Associated Press

Published: August 14, 2008

WASHINGTON - Retail sales delivered the weakest performance in five months in July as shoppers shunned autos while they paid more for gas.

With the mass mailings of $92 billion in rebate checks now just a memory, there is concern the fragile economy could slow even more in the second half of this year.

The Commerce Department reported Wednesday that retail sales fell 0.1 percent last month, the first decline since a 0.5 percent tumble in February. It was a worse showing than the flat reading economists had been expecting and followed a revised but still weak 0.3 percent reading for June.

Analysts said retail sales would have been more feeble without the $92 billion in rebate payments the government sent out in May, June and July. Those checks helped to counter plunging home prices, rising unemployment and soaring gasoline prices.

The bulk mailings are now over, though, leaving economists worried about what will happen next to spending.

"Cautious and uncertain consumers are watching their wallets, and with the back-to-school shopping season under way, that does not bode well for retailers," said Joel Naroff, chief economist at Naroff Economic Advisors.

Department store operator Macy's said Wednesday that its second-quarter earnings dropped slightly and warned that full-year profits will be below Wall Street expectations.

Susan Taylor-Demming, of Naperville, Ill., said the squeeze on the family budget has meant, among other things, that she drove to New Jersey with her two daughters for a summer vacation rather than fly.

"Play dates instead of water park adventures," she said.
Gasoline prices have been falling since hitting a high of $4.11 per gallon in the spring, and that should help consumer spending in coming months, economists said. But they wonder if that will be enough to offset the loss of the stimulus checks.

David Wyss, chief economist at Standard & Poors in New York, said he thinks consumers will spend about 60 percent of the money they receive in the first three months after getting the check, deciding to save the rest. That would be similar to the pattern seen when the government used tax rebates to fight the 2001 recession.

The overall economy grew at an annual rate of 1.9 percent in the April-June quarter, helped in part by the stimulus payments. Wyss said he was looking for growth of about 2 percent in the gross domestic product in the current July-September quarter. But he forecast that the GDP will shrink in the final three months of this year and the first three months of next year, as the impact of the rebate checks wears off.

Two consecutive quarters of falling GDP is the classic definition of a recession. Other economists said they expect negative GDP in those coming quarters.

Nigel Gault, chief U.S. economist at Global Insight, a Lexington, Mass., forecasting company, said he thinks GDP will shrink at an annual rate of 0.7 percent in the fourth quarter of this year and drop by 0.4 percent in the first quarter of next year. He said he is looking for these declines even with the help the economy will get if energy prices keep falling.

"I think there are too many negatives and the negatives are too large for a gasoline price decline to change the story significantly," he said.

At the White House, presidential spokesman Tony Fratto noted that the weakness in July retail sales reflected a big drop in auto sales during the month and other "substantial headwinds faced by households" such as high gasoline prices.

Auto sales fell by 2.4 percent in July - another dismal month for automakers, who saw sales activity plunge to the lowest level in 16 years as the weak economy and rising job layoffs severely dampened demand.

Excluding the big drop in autos, retail sales would have posted a 0.4 percent increase. Although that was a positive reading, it was still the weakest showing for sales excluding autos in five months.

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