| ECONOMIC PREVIEW
Don't be fooled by the numbers
Commentary: Data still too noisy to take at face value
By Rex Nutting, CBS.MarketWatch.com
Last Update: 6:09 PM ET Nov. 9, 2001
WASHINGTON (CBS.MW) -- The smoke still hasn't cleared from the Sept. 11 attacks.
The fog of war now applies to the economic statistics, as well. The bad numbers will look worse than they really are and the good numbers won't be quite as rosy as they appear.
Retail sales were hit hard by the Sept. 11 attacks. For a week or so, consumers stayed away from restaurants, bars, malls and auto showrooms. September retail sales fell an incredible 2.4 percent, but most of that decline was temporary.
What we want to know is what's the new long-term trend in spending, now that consumers have added the dangers of terrorism to their list of worries, topped by their jobs, their debt and their portfolios.
"Just to confuse us, consumers went on a buying spree in October," said Avery Shenfeld, economist at CIBC World Markets. Shenfeld thinks retail sales jumped 4 percent in October, which would be the largest gain in 15 years.
"We shouldn't be impressed that it's positive," said Peter Kretzmer, economist at Banc of America Securities, who expects sales rose 1.1 percent.
"It'll be difficult to interpret the numbers, but we can't not interpret them," Kretzmer said. "They are fundamental for GDP, monetary policy and for knowing whether consumers are getting over it."
The Commerce Department reports on October retail sales on Wednesday at 8:30 a.m. Eastern. The report is the highlight of the economic data for the coming week.
Wednesday will be a busy day elsewhere. Federal Reserve Chairman Alan Greenspan will speak at the U.S. Chamber of Commerce on the economic outlook and the oil exporting nations have scheduling a meeting in Vienna, Austria, on possible production cutbacks.
Either of those events could impact markets much more than any of the economic data.
Economists surveyed by CBS.MarketWatch.com expect that October retail sales rose 2.7 percent (the fastest rate in 11 years), largely because automakers offered unprecedented incentives, including free financing, to move cars out of their inventories. See Economic Calendar and Forecast.
The automakers said sales on an annual unit basis rose to 21.3 million in October, about 5 million more than what's sustainable, Kretzmer said.
Outside the auto sector, sales gains probably rose about 0.3 percent in October after plunging 1.6 percent in September, our consensus forecast says.
Chain store sales were healthier in October, with companies reporting same-store sales up 2.3 percent over year-ago levels, a bit better than expected. Once again, Wal-Mart and the other discounters took market share from everybody else. Specialty apparel stores suffered the most.
Restaurants and bars probably regained about half of the 5 percent of sales lost in September, Kretzmer said, as consumers felt more comfortable about celebrating in public again.
Gasoline sales probably subtracted from total sales as the price of gasoline plunged. Retail sales are reported raw, without adjusting for price changes.
Most economists are expecting consumer spending to fall in the fourth quarter compared with the third quarter. That's a big reason why they expect a 1.8 percent decline in gross domestic product in the quarter.
Kretzmer is relatively upbeat about the consumer. He thinks holiday sales will be better than the industry is now expecting. And automakers have continued their price promotions into November, which could give fourth-quarter sales "quite a pop," he said. He's looking for consumption to fall at a 2 percent rate for the quarter, enough to cut GDP by 1.7 percent.
The other data to be released will be largely ignored by the markets, unless the numbers are way outside of predictions.
The consumer price index, which is usually a top-tier indicator, will get only passing notice on Friday. Economists expect that prices fell 0.3 percent on the collapse in energy prices in October. The core CPI was probably flat.
The producer price index fell a record 1.6 percent in October, but commodity prices play a smaller role in the CPI than in the PPI, so the decline in consumer prices should be less.
The core PPI sank 0.5 percent because the free financing effectively cut the price of cars at the wholesale level. But don't expect a similar impact on the CPI.
"The CPI car price index is based only on the price of the car itself, not the cost of financing it," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.
If investors like the low inflation in the CPI number at 8:30 on Friday, they'll lose that momentum 45 minutes later when the Fed reports on industrial production for October.
Output of the nation's factories, mines and utilities has fallen 12 months in a row to a level 5.8 percent below September 2000.
Economists think it fell another 0.7 percent in October and more than a quarter of the nation's productive capacity was idle.
The decline in manufacturing seems to have accelerated in the past few months.
"While the short-term pain is severe, the silver lining is that rapid and decisive reductions in hours worked [are] establishing a strong base for accelerating productivity gains and rebounding profit margins when a pickup in demand unfolds," Kretzmer said.
Throughout the slowdown, firms have continued to add to their capacity. But that might be about to end, said John Youngdahl, economist at Goldman Sachs.
"The collapse in business fixed investment spending has brought the growth rate of industrial capacity down by more than ever before in the 34-year history of the data series," Youngdahl said.
Capacity has fallen in just one quarter since 1967: the fourth quarter of 1975.
"It could create fertile ground for a strong rebo