US retail sales fall adds to pressure for rates cut

By David Prosser, Deputy Business Editor
Published: 15 September 2007

The latest US retail sales data added to the pressure on Federal Reserve chairman, Ben Bernanke, to cut interest rates yesterday, providing further evidence of a slowdown in the American economy.

The US Commerce Department said retail sales rose by just 0.3 per cent during August, down from 0.5 per cent in July. The figure was lower than economists had expected, and was also artificially inflated by higher-than-expected consumer spending on new cars. Stripping out the automobile sector, US retail sales actually fell 0.4 per cent last month, the worst result since last September.

Data from the US Labor Department, showing that industrial production increased by a lower-than-expected 0.2 per cent in August, compounded nervousness about the strength of the American economy.

Stephen Gallagher, an economist with Société Gé*érale, said: "We cannot escape the sense of flagging momentum in August," though he said the strength of spending in the automobile sector suggested that consumers did not feel so insecure that they had stopped making large purchases.

The sales figures reinforced expectations that the Fed will cut rates next week, with the dollar falling sharply on world currency markets. A majority of economists expect Mr Bernanke to reduce base rates by 0.25 percentage points, though some analysts hope he will go further, with a 0.5 percentage point cut.

Helpfully, the Labor Department said yesterday that the price of imports into the US fell 0.3 per cent in August, reducing pressure on inflation and increasing the Fed's scope for rate cuts.

Fears of a slowdown in the US have been growing in recent months. "We are entering a different environment as the US consumer responds to falling house prices and the broader economy to tighter credit conditions," said Ian Kernohan, global economist at Royal London Asset Management.

Mr Kernohan said the Fed could still avert a recession if it acted quickly. "We should not underestimate the risks to the US economy, but neither should we underestimate the likely effect of lower US interest rates."

Economists pointed out that yesterday's retail sales data offered a mixed picture of consumer spending. Sales in several housing-related sectors, such as furniture, rose last month, with spending on electronics also showing an increase.

Tim Rogers, chief economist at Briefing.com, said: "The outlook certainly isn't for the consumer to crumble – clearly there are risks that weren't there even a few weeks ago, but income growth is still supporting spending."