The Clinton Herald, Clinton, Iowa

AP story section

November 21, 2013

Solid retail sales lift hopes

(Continued)

Because consumers fuel about 70 percent of U.S. economic activity, expectations have arisen that the better-than-expected retail sales last month could build momentum for November and December.

Before October’s retail sales report, most analysts predicted that the overall economy would grow at a weak annual rate below 2 percent in the current quarter. But after the report was issued Wednesday, Paul Dales, senior U.S. economist at Capital Economics, boosted his forecast: He thinks additional consumer spending will cause the overall economy to grow at an annual rate between 2 percent and 2.5 percent this quarter.

Coupled with the retail sales was a slight decline last month in consumer prices.

The consumer price index fell 0.1 percent in October, the Labor Department said. A sharp 2.9 percent drop in gasoline prices largely caused inflation to be held in check. Over the past 12 months, inflation has averaged 1 percent, well below the Federal Reserve’s 2 percent target.

U.S. gasoline prices began falling in the spring and reached two-year lows earlier this month. The average price of a gallon of gas was $3.21, according to AAA’s Daily Fuel Gauge Report.

And just as clothing purchases rose in October, consumers benefited from declining apparel prices. They fell 0.5 percent for the second consecutive month.

But inflation rates this low are a double-edged sword: Lower prices tend to signal an economy struggling to grow at a healthy pace.

Inflation has been modest over the past four years, with prices held down by the weak recovery from the Great Recession. Unemployment remains high at 7.3 percent. And many Americans who do have jobs are not receiving pay increases. That’s made it difficult for consumers to spend more and for retailers to charge more.

“Can spending hold up?” said Joel Naroff, president of Naroff Economic Advisors, in a client note. “That is not clear. Real earnings, which are adjusted for inflation, rose moderately but only because inflation fell. Not adjusted for inflation, compensation went essentially nowhere.”

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