Stimulus Checks Push Retail Sales Rally; Economy Still Facing Uphill Battle

By Jason Simpkins
Associate Editor

Stimulus checks helped send retail sales up 1% in May, the Commerce Department said yesterday (Thursday), bolstering the dollar and lifted the mood on Wall Street.

But the effects may not last, as unemployment continues to rise and crude oil supplies tighten.

Record high gasoline prices padded the report, but purchases still increased in every other sector. Gasoline sales jumped 2.6% last month and have gained 13.8% in the past year. Excluding gasoline, sales still climbed 0.8%.

"Yes, we bought a lot more gasoline as prices skyrocketed," said Joel Naroff, president and chief economist at Naroff Economics Inc. "But the sales gains may not have kept up with the cost increases. More importantly, you name the good, electronics, appliances, clothing, health care, food or general merchandise and sales rose. We even ate out more.  That is impressive, to say the least."

Story continues below...

Many economists were impressed by the figures as retail sales rang up $385.4 billion for the month. However, most attributed the growth to the $50 million in economic stimulus payments the U.S. government sent out in May, and analysts are divided on whether their positive effect will continue.

"The full impacts of the rebate checks are still to come as people are still receiving them," Naroff said. "That holds out hope that consumption will continue to expand through the summer."

Then again, unemployment is on the rise having reached 5.5% in May, a 0.5% increase from April - the largest monthly increase in 23 years. Initial claims for unemployment benefits rose to 384,000 last week from 359,000 for the week ended June 6.

"This good [retail] report suggests the tax rebates are having an impact," Mark Zandi, chief economist at Moody's, told Bloomberg in a radio interview. "As these effects fade, the weaker job market will take over."

Also, after nine months cutting interest rates and lending freely to financial firms hoping to ease the pain of the credit crunch, U.S. Federal Reserve Chairman Ben S. Bernanke is has been phrasing a reversed course to battle inflation.

"The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so," Bernanke said earlier this week. "The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations."

Coupled with tough talk from the European Central Bank, the message is clear: The U.S. Federal Reserve can no longer afford to stand by and watch the value of the dollar plummet. And if that means the economy and investors limp through the remainder of 2008, so be it.

"The immediate effect from this dramatic shift in policy priorities has been to 'drain' visibility, confidence and liquidity from financial markets," Tullett Prebon economist Lena Komileva wrote this week, according to Fortune. "With monetary policy adopting the role of a risk-driver rather than a source of relief for financial markets, current conditions are actually worse than they were last August when the credit crunch erupted."

News and Related Story Links: