Recovery Underway, Bernanke Suggests
Rise in Retail Sales For August Goes Beyond 'Clunkers'

By Ylan Q. Mui and Neil Irwin
Washington Post Staff Writers
Wednesday, September 16, 2009

Federal Reserve Chairman Ben S. Bernanke said Tuesday that the recession is "very likely over," offering his most explicit endorsement so far of the view, increasingly widespread among economists, that a recovery is underway.

Even as he warned that the expansion could prove lackluster, new data released Tuesday provided evidence that the economy was turning around, showing that Americans returned to stores in August and increased their spending at the highest rate in three years.

With consumers flooding auto dealerships to take advantage of the "Cash for Clunkers" program, total retail sales rose 2.7 percent over the previous month, the Commerce Department said. What surprised analysts was that even excluding auto sales and gasoline, retail sales rose a solid 0.7 percent.

That eased fears, shared by many economists, that the bump in auto sales would come at the expense of spending on other goods and services. In August, at least, people did not scrimp on other purchases even while buying new automobiles.

Bernanke, meanwhile, acknowledged what a growing chorus of analysts has concluded: That the economy bottomed out this summer and is now expanding, at least as measured by gross domestic product. Many forecasters say the nation's output of goods and services is now rising at an annual rate of 3 percent or higher. But the Fed chairman also described continued weakness in the job market.

"Even though from a technical perspective the recession is very likely over at this point, it's still going to feel like a very weak economy for some time, as many people will still find that their job security and their employment status is not what they wish it was," Bernanke said in response to a question after a speech at the Brookings Institution.

His comment about the recession ending was more blunt than in other recent appearances, for instance in August, when he said only that "economic activity appears to be leveling out" and that "prospects for a return to growth in the near term appear good."

Bernanke cautioned that the recovery may not be strong enough in 2010 to generate significant job growth or bring down the unemployment rate. The economy needs to grow in the short term faster than its long-term trend, or else "it'll be relatively slow in creating jobs over and above those needed to employ people coming into the labor force," Bernanke said. "Therefore, the unemployment rate would tend to come down quite slowly."

Spending Here, Not There

The promising forecast for the second half of 2009 reflects efforts by businesses to replenish their depleted inventories and increased government spending as the stimulus program shifts into high gear.

But prospects for the rest of the year may not be so rosy. Economists think the clunkers program encouraged people simply to buy new cars sooner, perhaps at the expense of other major purchases. In addition, August is the peak of the back-to-school shopping season, and several states declared sales-tax holidays last month to encourage spending.

"This tapped out consumers to some extent," said Brian Bethune, chief U.S. financial economist for IHS Global Insight. "There's no way that the consumers can really fire on all cylinders here."

Arlington resident Erin Slattery, 26, has cut back on dinners since moving from Kansas City earlier this year. But she and her boyfriend, who live together, decided to take advantage of the Cash for Clunkers program and turn in his 1998 Jeep Cherokee for a new Jeep Patriot.

The deal resulted in a roughly $275-a-month car payment, and Slattery said she has put off thoughts of a big vacation in favor of a less-expensive road trip, especially now that they have a car with air conditioning.

"For us to take on a huge new payment was kind of an interesting situation, I felt," Slattery said. But she added she hopes the savings in gas will help make up some of the difference.

Similar programs have been underway in Europe, proving particularly popular in Germany. Passenger car sales in that country were up 28 percent in August compared with the previous year. But other sectors have suffered, and the head of the wood and furniture industry reportedly blamed at least part of that industry's declining sales on the clunker program.

Although the 5 billion euros dedicated for car rebates in Germany has been wiped out, thousands of sales are still being processed and will likely boost spending for the next several months. In France, a comparable program has been so successful that the government is considering extending it into next year.

The long-term effects of clunkers programs abroad and at home remain unclear. In the United States, building-supply stores and home furnishing stores were the only two sectors last month to post declines, though they have long been struggling. But shoppers still seemed willing to make smaller discretionary purchases -- at least for now.

Clothing stores reported a 2.4 percent increase in August sales from the previous month, and department stores saw a similar gain, according to the Commerce Department figures. Sales at sporting goods and book stores rose 2.3 percent, and electronics retailers had a 1.1 percent increase.

The 0.7 percent gain in retail sales excluding autos and gasoline is the first gain in six months, and the industry welcomed the news with cautious optimism.

"Shoppers were a bit more comfortable digging into their wallets last month, and retailers are hopeful that we've turned a corner," said Rosalind Wells, chief economist of National Retail Federation. "It is encouraging to see some momentum building as retailers anticipate the all-important holiday season."

An End to the Free Fall?

The results are the latest of several encouraging signs that the recession is easing and the free fall in consumer spending -- which accounts for about two-thirds of the gross domestic product -- is over. Consumer confidence rebounded in August after two months of declines, according to the Conference Board. Research firm ShopperTrak reported that foot traffic at the country's shopping centers was up 5.9 percent in August compared with the previous month.

But compare retail sales with last year's, and it is clear that consumers remain restrained. Total retail sales fell 5.3 percent in August from a year earlier, according to the Commerce Department. And despite the big monthly jump in auto sales, they were still down 1 percent from last year.

The next few months will be crucial in assessing the health of consumers. Retailers are worried that the popularity of cash for clunkers could hurt sales at malls and shopping centers this holiday season as many families budget for new monthly car payments. Also, economists say rising unemployment and the tight credit market continue to put pressure on shoppers.

"The recovery in the consumer sector is lagging behind that in other parts of the economy," said Paul Dales, U.S. economist for Capital Economics.

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