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Retail sales drop in January, pulled down by sagging auto sales

| Friday, Feb. 14, 2003

WASHINGTON (AP) — A big drop in automobile sales swamped gains registered by other merchants, causing overall sales at the nation's retailers to fall in January.

While consumers — the main force keeping the economy going — stayed away from car dealer showrooms last month, they hit other stores. That made economists hopeful shoppers will keep their pocketbooks and wallets sufficiently open in the months ahead to prevent the economy from falling into a new recession.

"If you park auto sales off to the side, retail sales remain on a healthy trend," said Bill Cheney, chief economist at John Hancock Financial Services.

Even as economists expressed such optimism, they were mindful of risks that could upset that scenario: Worries about a possible war with Iraq and fresh warnings that terrorists could strike the United States again could make consumers clam up, weakening the fragile recovery.

"It could be choppy," said Carl Tannenbaum, chief economist at LaSalle Bank.

Retail sales dropped by 0.9 percent in January, a turnaround from the 2 percent gain posted in December and the worst showing in four months, the Commerce Department reported Thursday.

But much of January's weakness reflected a sharp 7.5 percent decline in automobile sales, the largest drop since November 2001. Consumers took a breather after a buying binge in December, when auto sales jumped 7.9 percent.

The decline in sales came even though incentives remained generous in January, said Paul Taylor, chief economist at the National Automobile Dealers Association.

"People are making more conservative decisions in the car that they buy," Taylor said. Cold weather in many parts of the country last month also slowed traffic to showrooms, he added.

But excluding automobile sales, which can swing widely from month to month, sales at other retailers actually rose by 1.3 percent in January, the biggest gain since September 2000.

"The solid gain in core sales does suggest that consumers continue to underpin the economy, despite weaker confidence," said Maury Harris, chief economist at UBS Warburg. "Households may be detecting a slightly better job market."

In another report, new claims for unemployment benefits last week dropped by 18,000 to 377,000, a four-week low, the Labor Department said. That suggested the pace of layoffs is stabilizing, welcome news for workers worried about keeping their jobs.

In the retail report, sales at building and garden supply stores rose 2.9 percent in January, following a 1.2 percent decline.

At department and other general merchandise stores, sales rose 0.6 percent, up from a 0.4 percent increase. Health and beauty stores sales went up 1.1 percent after decreasing 0.2 percent in December.

Sales of sporting goods, books and music rose 0.3 percent in January, a turnaround from the 0.9 percent drop the month before.

Food and beverage stores saw sales rise 2.6 percent last month, following a 1.3 percent decline. At bars and restaurants, sales rose 1.1 percent, down from a 2 percent advance.

Sales at clothing stores edged up 0.3 percent, after a 0.8 percent rise.

Higher prices at the pump pushed up gasoline station sales by 2.7 percent in January, after a 1.7 percent rise.

The Federal Reserve last month decided to leave a key interest rate at a 41-year low of 1.25 percent, with the hope that will encourage consumers and businesses to spend and invest more and help along the recovery.

A main force holding back the recovery is the wariness of businesses to make big commitments in hiring and in capital spending, given war worries and other economic uncertainties.

Fed Chairman Alan Greenspan told Congress this week that he was hopeful that once such "geopolitical" uncertainties lift, businesses would be much more willing to step up capital investment and hiring, forces that would boost economic growth.

Against that backdrop, Greenspan said President Bush's proposed 10-year, $1.3 trillion tax-cut package isn't needed to stimulate the economy, dealing a blow to the president's efforts to sell the plan to Congress.

But new Treasury Secretary John Snow defended Bush's plan Thursday as he embarked on campaign to build support for it at the grass-roots level.

"I think it's the right medicine at the right time," Snow said in a speech in Detroit.

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