The likelihood of a further emergency rate cut in American interest rates decreased yesterday as new data showed that US retail sales rose unexpectedly by 0.3 per cent in January.
However, economists gave warning that the outlook for the American economy remained poor and that a further rate cut, probably of 0.5 percentage points, was still likely at the Federal Reserve’s next scheduled interest rate meeting on March 18.
Ethan Hawke, chief US economist at Lehman Brothers, said: “It’s comforting to know that the consumer isn’t collapsing, but is just weak. The big question at the moment is whether we are in a weak economy or a recession, and this report suggests it is just a weak economy.”
“This doesn’t mean the Fed stops cutting, but it does take the wind out of the sails for an inter [emergency] cut.”
The Fed imposed an emergency three-quarter-point cut in the cost of borrowing to 3.5 per cent on January 22, then reduced the rate by a further half-point at its scheduled meeting eight days later.
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The 0.3 per cent rise in January’s consumer spending compared to a consensus estimate of a 0.3 per cent decline and followed a 0.4 per cent drop in December. It was fuelled by increased spending on cars, clothes and petrol, according to the Commerce Department.
So-called filling station sales rose by 2 per cent in January, sales at clothing retailers increased by 1.4 per cent and revenues at groceries increased by 0.6 per cent. Sales at car dealerships and parts stores rose by 0.6 per cent.
But there were also plenty of signs that implied consumer spending was on the decline. Sales at department stores fell by 1.1 per cent, revenues at building suppliers declined by 1.7 per cent and furniture was down by 0.5 per cent.
Consumers, whose spending accounts for about two thirds of the economy, are in the midst of the worst housing decline for 25 years.
This has reduced their confidence to borrow money at the same time as the tightening credit crunch makes it harder for them to borrow to finance big purchases.
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Meanwhile, the economy lost 17,000 jobs in January, the first drop in more than four years.
America’s poor economic outlook is posing problems for key American policy makers such as Ben Bernanke, the Chairman of the Federal Reserve, and Henry Paulson, the US Treasury Secretary.
Both will testify today before the Senate’s committee on banking, housing and urban affairs, as part of a concerted political effort to address the related problems of the mortgage market and the economy.
Confidence in the US economy was given a further tentative boost yesterday as Coca-Cola, the world’s largest soft drinks maker, and Deere & Co, the world’s largest maker of tractors and combine harvesters, posted quarterly profits that exceeded expectations.
Coca-Cola reported a 79 per cent rise in net income for its fourth quarter to $1.21 billion, in part because of higher sales of vitamin water in the US.
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Meanwhile, Deere announced a 55 per cent rise in its first-quarter profit, to $369.1 million, as global farm demand boosted sales of agricultural equipment.