Experts expect higher retail prices as economy recovers.

Experts expect higher retail prices as economy recovers.
Dallas Morning News
Corporate America's pain has been the consumer's gain.
"Sale, sale, sale!" marked the recession and subsequent recovery. And consumers heeded the call. Consumption never waned, and the spending became a vital pillar of economic activity in the last three years.
Companies, on the other hand, have resisted rehiring or investing throughout the tech wreck, corporate malfeasance scandals and uncertainty over terrorism and Iraq.
Although businesses have largely sat on the sidelines, recent economic gauges suggest that could be changing.
"This may, in fact, be a turning point," said Craig Thomas, senior economist at Economy.com in West Chester, Pa. "But the turning point giveth and the turning point taketh away."
What he means is that a full recovery inevitably means higher prices -- and higher interest rates -- for consumers. Up till now, businesses have had little to no pricing power. And that has to change if the fledgling recovery is to pick up speed.
"Is everyone prepared to trade stronger business conditions for a less friendly consumer marketplace?" asked Thomas. "I don't know that we are."
In other words, will the coming higher prices finally end Americans' great shopping spree just as the economy kicks into higher gear?
Thomas thinks so.
But other economists disagree.
"There will be a constraint on spending," said Michael Niemira, senior retail analyst at Bank of Tokyo-Mitsubishi Ltd. in New York. "On the other hand, you would normally expect an improving economy will ultimately generate job growth and, with it, income."
Whether or not Americans become more frugal is of particular interest at this point in the economic recovery.
Consumer spending makes up two-thirds of the U.S. economy, and that consumption is needed to propel the recovery beyond its lackluster state.
The current economic recovery has posted sub par results compared with previous upturns in the business cycle. Business has yet to resume spending in earnest, and many companies continue to slash payrolls, keeping the labor market weak.
So far, companies have increased profits by cutting costs and increasing productivity without enlarging their work forces.
But there is increasing evidence that the economic climate is becoming more favorable for business. Inventories are lean, and durable goods orders are rising.
"There will continue to be a gradual recovery in capital spending," said Anthony Chan, chief economist at Banc One Investment Advisors in Columbus, Ohio.
Even the embattled manufacturing sector is showing some positive signs. Nearly half of U.S. metal-forming companies predicted an increase in orders over the next three months, according to the Precision Metalforming Association business conditions report. That's a 12 percent improvement over the previous survey.
The problem, Thomas said, is that economic turning points usually mean a resurgence in consumer spending. Historically, consumers have reined in spending during the downturn and ratcheted up savings.
Recessions usually cause both households and companies to clean house. Debt is paid off, and operations become lean and efficient again.
But this recession saw the federal funds rate drop from 6.5 percent in January 2001 to 1 percent today -- the lowest in more than 40 years -- which instead fueled spending.
"This is a fairly unique situation," said Thomas. "You could think several decades back and not come up with a period more friendly for consumer spending than the last several years."
Nearly three years after the first rate cut, however, consumers are showing signs of strain.
The Federal Reserve Bank recently reported that, compared with a year ago, growth in consumer credit outstanding is at its slowest pace in a decade and is still sliding, according to Economy.com.
"In the third quarter, spending will be held up by the crutches of the tax cut," said Chan. "Consumers will step back as refinancing is not an option anymore. Consumers will slow down."