Reports cheer stock markets

Data on wholesale prices and retail sales suggest to investors that interest rates will not rise.

By Compiled from Times wires

© St. Petersburg Times, published August 12, 2000

Zealous investors pushed the Dow Jones average above 11,000 for the first time in nearly four months Friday after two economic reports showed Americans increasing their spending while inflation on the wholesale level appears to remain in check.

The data cheered investors, who now expect the Federal Reserve will leave interest rates unchanged when policymakers meet later this month. Wall Street also was hopeful that a report showing higher-than-expected retail sales would translate into better corporate earnings.

"It's the best of all worlds -- strong growth, minimal inflation and the Fed more than likely on the sidelines at least through the elections," said Joel Naroff of Naroff Economic Advisors.

The Dow Jones Industrial Average climbed 119.04, or 1.09 percent, to 11,027.80, its highest close since April 25, when it finished at 11,125. For the week, the Dow rose 260 points, or 2.4 percent.

The Standard & Poor's index of 500 companies rose 0.79 percent Friday to 1,471.84, and the Nasdaq Composite Index was up 0.78 percent at 3,789.47.

But economists said Wall Street might be overreacting to Friday's economic reports.

"We have an economy that is slowly shifting in shades of gray, not the black-and-white market that's being priced into the financial markets," said Diane Swonk, chief economist for Bank One Corp.

Swonk expects the Fed to keep rates unchanged through the election but said it is too soon for Fed chairman Alan Greenspan to declare victory over inflation.

"Greenspan has very much painted himself as an enemy of inflation, not necessarily an enemy of growth. He's not ready to move unless he has a smoking gun. And I think he will over the next year," she said.

A Labor Department report Friday showed July's Producer Price Index for inflation at the wholesale level remained unchanged after a 0.6 percent surge in June caused by soaring energy costs.

That index, which measures inflation before it reaches the consumer, was flat in July mostly because of a 0.7 percent decrease in gasoline and other energy costs, which had seen a 5.1 percent jump in June.

July's no-increase performance for wholesale prices was better than economists had expected. They had been looking for a small 0.1 percent rise.

The news also was good after volatile food and energy costs were excluded. The so-called core rate of inflation was up just 0.1 percent in July, after a 0.1 percent fall in June.

So far this year, inflation at the wholesale level has risen at an annual rate of 4.1 percent, an acceleration from a 2.9 percent rise in wholesale prices for all of 1999. However, the speed-up was caused by the surge in energy prices. Excluding energy and food, wholesale prices have risen a very moderate 1.1 percent, basically unchanged from last year's 0.9 percent increase in core inflation.

"The spike in energy prices has failed to set off a wider acceleration in inflation," said National Association of Manufacturers economist Gordon Richards. "Once the surge in energy costs is over -- and it is probably over already -- the inflation rate should move back on a trend of less than 2 percent a year."

In a second report, the Commerce Department said Friday that retail sales posted a substantial gain of 0.7 percent in July, driven by gains in auto sales and other big-ticket items. The rise followed a 0.4 percent increase in June and pushed sales 8.1 percent above July a year ago.

"It certainly wasn't as benign as what had been expected," said Tim O'Neill, chief economist for Harris Bank/Bank of Montreal, of the retail sales growth. O'Neill doubts the July figures will cause the Fed to raise rates right away, but he also doubts that inflation has been tamed for the long term.

"People don't run out of things to spend their money on. They run out of income to spend on those things. You can't rely on fatigue, or on saturation, to slow consumer spending," O'Neill said.

That means that if income growth and consumer confidence remain high, the Fed will have to raise interest rates to temper spending and keep inflation at bay, he said.

Durable goods increased 1.2 percent from June and were 6.3 percent above last year.

- The Chicago Tribune and Associated Press contributed to this report.

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