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Unemployment, borrowing, retail sales paint mixed picture of economic recovery

By Sonja Ryst and Peter Whoriskey
Washington Post Staff Writer
Friday, July 9, 2010; A14

More than 450,000 people filed new claims for unemployment benefits last week, as joblessness continued to hamper the U.S. economy and other new economic indicators reflected mixed signs about the recovery.

The number of people filing new unemployment claims has fluctuated between 450,000 and 500,000 a week since January, on a seasonally adjusted basis. Although that is down from last year, it remains an indication of ongoing weakness, economists said.

Other new figures showed that consumer borrowing fell again in May, suggesting that Americans remain nervous about the economy. June retail sales jumped 3 percent, though some analysts noted that deep discounts in prices boosted that number.

"We should feel better because we see consumers out in the stores again," said Craig Thomas, senior economist at PNC Financial Services Group. "We're seeing a recovery but at an uncomfortably moderate pace."

The new unemployment figures come as Congress continues to weigh another extension of unemployment benefits. About 1.7 million people had run out of benefits as of last week, according to the Labor Department. That figure could rise to 3.2 million by the end of the month if Congress decides against continuing the benefits.

"There are headwinds still facing consumers right now," said R.J. Hottovy, a Morningstar analyst.

The Federal Reserve said Thursday that consumer borrowing dropped by $9.1 billion in May. It has fallen in 15 of the past 16 months, and some economists consider the drop a sign of economic weakness. But others said the reduction in consumer debt suggests that households are embracing a more sensible frugality.

"I see this as wonderful evidence that households have learned a lesson," Thomas said. "That's very good news for the long-term soundness of the U.S. economy."

The International Council of Shopping Centers' index of retail sales rose 3 percent in June, slightly ahead of 2.6 percent growth in May but lower than the fiscal year-to-date pace of 3.8 percent.

Clothing stores had stronger sales, which some analysts attributed to aggressive markdowns.

While Abercrombie & Fitch said sales rose 9 percent, Chandi Neubauer, a retail analyst at Majestic Research in New York, said the store "bought" its results. It had been offering merchandise for 30 percent off and recently cut prices to 50 percent off. The words "A&F SUMMER SALE" -- in block letters -- dominated the store's Web site Thursday.

"They definitely sacrificed [profit] margin as a result, but they're also going back to school with a clean floor and not a lot of clearance," Neubauer said. "It's probably setting them up for a good back-to-school season."

Costco Wholesale said Thursday that sales rose 4 percent during the five weeks ended July 4 compared with the same period last year.

"Underlying comp growth was driven entirely by strong customer traffic," William Blair & Co. said in a research note. "We believe Costco's business will benefit from stronger small-business spending and the potential for an improved average ticket and a membership fee increase in fiscal 2011."

Other retailers' sales disappointed analysts. Gap said Thursday that its sales were flat in June compared with a year ago, and Target said its sales were 1.7 percent higher.

Andy Wolf, analyst at BB&T Capital Markets, pointed out that unemployment hasn't been that positive, and after recent negative news about things like the stock market, he believes retail sales are probably going to slow from their torrid pace earlier but remain better than last year.

"If there's decent news on the job side, they'll begin to firm," Wolf said.

The ups and downs have left consumers and small businesses guessing.

Marcia Levi, co-owner of Chocolate Moose, a gift store in the District, said the tough economy has taught her how to manage money. Years ago she would order huge amounts of products for her store at 1743 L St. NW without considering how quickly things would sell. Now she orders more according to what she thinks will sell in the next couple of months.

"I'm so on the fence with the economy," Levi said. "It's like one step up and two back."

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