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Consumers splurge and reward retailers

| Wednesday, April 14, 2004

WASHINGTON -- America's shoppers, buoyed by an improved job climate and tax refunds, indulged themselves in March and boosted sales at the nation's retailers by the largest amount in a year, a promising sign the economy is back in the groove.

The stunning 1.8 percent gain in retail sales reported Tuesday by the Commerce Department added to evidence that the economy has closed out the January-March quarter of this year on a strong note and was entering the current quarter with good momentum, analysts said.

"The picture clearly emerging is that of a resurgent economy," said Bill Cheney, chief economist at John Hancock Financial Services.

Shoppers splurged on a wide range of goods in March, including cars, clothes, furniture, and building and garden supplies. January's and February's overall sales figures, meanwhile, turned out to be better than previously estimated, rising by 0.5 percent and 1 percent, respectively.

The latest snapshot of retail activity showed that consumers have a hearty appetite to spend. That's good news for the economy because consumer spending accounts for roughly two-thirds of all economic activity in the United States.

Economists said stronger job growth, tax refunds and super-low borrowing costs probably made shoppers feel more inclined to treat themselves. Those forces blunted the negative impact of soaring energy prices, especially gasoline, analysts said.

"It was a blowout report," said Stuart Hoffman, chief economist at PNC Financial Services Group. "Consumers were shopping themselves silly in March. The whole first quarter was a barn burner for consumer spending."

But on Wall Street, the retail sales report made investors worry that the Federal Reserve might move to raise interest rates sooner than some anticipated. The Dow Jones industrials lost 134.28 points to close at 10,381.28.

The 1.8 percent increase in retail sales last month marked the biggest advance since March of last year and exceeded analysts' expectations.

With the health of the economy a major issue in the presidential campaign, the Bush administration was quick to seize on the retail sales figures. "It's another sign that our economy is strong and growing stronger," said White House press secretary Scott McClellan.

In a second economic report, businesses increased inventories by 0.7 percent in February -- the biggest increase since August 2000, the Commerce Department said. Analysts viewed that as a sign that companies are feeling better about the recovery's staying power.

The strong retail sales figures are leading some economists to boost forecasts for economic growth, as measured by gross domestic product, for the January-to-March quarter.

Some are expecting the economy to grow at a rate of around 5 percent, or possibly more. That's up from previous estimates of around a 4.5 percent pace. The government will release its estimate for first-quarter GDP on April 29.

In an effort to help the recovery flourish, Federal Reserve policy-makers have held a key short-term interest rate at a 45-year low of 1 percent since June of last year. But Fed Chairman Alan Greenspan and other Fed policy-makers have reminded Main Street and Wall Street numerous times that rates can't stay at such super-low levels indefinitely.

That has prompted some economists to predict that the Fed will start pushing up rates later this year, possibly in August. Others, however, don't see a rate increase until 2005. There seems to be agreement, though, that the Fed will leave rates alone at its next meeting in May.

Some Fed policy-makers have suggested that there needs to be a sustained recovery in the job market before the Fed start ordering rates to go up.

After months of lackluster job gains, the economy in March added 308,000 jobs -- the most in four years. That raised hope among economists that the labor market may be turning a crucial corner.

President Bush trumpeted the March payroll figures as evidence his economic policies are working. But presumptive Democratic presidential nominee John Kerry says that's not the case and has pointed to the net 1.84 million jobs the country has lost since Bush took office in January 2001.

Continued improvements in the job market, however, would bode well for consumer spending in the months ahead and probably would erase fears voiced by analysts earlier this year of the possibility of an economic slowdown in the second half of the year, economists said.

"The economy has been put through a lot, but I think this is now a self-sustaining economic expansion," said Mark Zandi, chief economist at Economy.com.

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