Weak sales could nudge Fed to rate cut

Jitters over a slowing US economy intensified yesterday with the release of weaker-than-expected retail sales figures for August, further raising expectations that the Federal Reserve board will cut interest rates next week for the first time in four years.

Retail sales edged up 0.3 percent last month, but the sales of cars, trucks, and auto parts accounted for a large part of the gains, according to the Commerce Department. When the motor vehicle numbers are stripped out, sales slipped 0.4 percent.

Economists have been watching consumer spending for signs that the problems in the housing and subprime mortgage markets could be seeping into the larger economy. The retail sales report is considered a key indicator, particularly at a time when back-to-school shopping for everything from apparel to electronics to sporting goods is typically brisk.

This year, however, sales activity has been driven by heavy discounting, especially in the automotive sector, economists said.

"I wouldn't characterize retail as terribly strong now," said Rosalind Wells, chief economist at the National Retail Foundation, a Washington trade association. "There is a lot of discounting going on. Retailers are facing a consumer that's more financially strapped."

The picture was mixed, however, as an upward revision in July's retail sales by the Commerce Department, to an overall 0.5 percent increase, suggested that consumers hadn't pulled back as much as feared over the summer. And in contrast to August, nonautomotive sectors, such as electronics, clothing, and health and personal care, showed more strength than the motor vehicle sector in July.

Continuing its volatility, the Dow Jones industrial average closed up 17.64 points, or 0.1 percent, at 13,442.52 yesterday after plunging early in the day when the retail numbers came out but rebounding when the University of Michigan reported consumer confidence continues to rise. Still, the retail report was troubling.

"Certainly retail sales are not firing on all cylinders right now," said Brian Bethune, US economist at Global Insight, a Waltham research firm. "It takes some incentives to keep the volume up. Retailers need to put out the bait. That's the name of the game now."

Yesterday's retail report, coming after last week's report by the Bureau of Labor Statistics that employers had cut jobs for the first time in four years, increased pressure on the Federal Reserve board of governors to pare interest rates at its meeting Tuesday.

Although many economists are anticipating a quarter-point cut to 5 percent in the short-term federal funds rates, some think a worsening economic outlook might prompt a half-point cut.

"We're looking at a weak consumer outlook," Bethune said. "It would unleash a negative reaction if the Fed stands pat. It would be out of line with what most economists think."

But the Fed, under its new chairman Ben Bernanke, also must be concerned about spooking investors with a deeper cut, warned Connecticut economist Nick Perna. He noted that, until relatively recently, the Fed has been more concerned about overstimulating the economy and producing inflation through rate cuts.

"It just seems to me that what you have now is an economy whose overall growth is slowing," said Perna, who projects an increase of just 1.5 percent in the gross domestic product for the second half of the year. "The problem with that, as anyone who's flown a plane will know, is you're getting close to the stall speed. You're still going forward, but not fast enough to keep things up in the air."

Robert Weisman can be reached at weisman@globe.com.