Sat, Mar 23, 2002 page19

• Lower US consumer prices may be a drag on recovery

  • BLOOMBERG
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  DaimlerChrysler AG's Chrysler unit learned this year that consumers have been in charge of the US economic recovery, to the detriment of profits.

  The No. 3 US automaker tried to retreat from no-interest loans, an industry incentive that powered consumer spending late in 2001. The effort failed after General Motors Corp offered US$2,002 cash rebates in January. The No. 1 producer resurrected zero percent financing this month.

  

  The Z Frank Chevy car dealership in Chicago, Illinois, advertises a zero percent financing promotion.

  PHOTO: BLOOMBERG NEWSN

  "We got a lesson that we're a price follower," said Van Jolissaint, a DaimlerChrysler economist.

  Chrysler and General Motors plan to spend less on equipment so they can afford the low prices consumers have grown to expect.

  Competition is holding down prices at companies such as Gateway Inc and Delta Air Lines Inc as well, eroding profits and the ability of businesses to invest in productivity enhancements.

  "It's hard to see then how we get back to a real strong sustained growth rate," said James Paulsen, chief investment officer at Wells Capital Management in Minneapolis.

  Federal Reserve Chairman Alan Greenspan said last week that any recovery in business investment is likely to be "only gradual" this year. While declaring that the economy was expanding "at a significant pace," the rate-setting Open Market Committee said Tuesday the "degree of strengthening" remains in question.

  Consumers have pitched in to aid the recovery, spending in the final quarter of 2001 at a 6 percent annual rate, the fastest in three-and-a-half years, figures from the Commerce Department show. The economy grew at a 1.4 percent pace, the most in a year, after a quarter of contraction. Business spending on equipment and software, meanwhile, has fallen for five straight quarters.

  GDP picked up with little inflation. Consumer prices in February were 1.1 percent higher than a year earlier, one of the smallest increases in 15 years. Prices rose 0.2 percent in February from a month earlier.

  Chrysler was hoping to reduce incentives this year and shift more attention to bolstering profits. DaimlerChrysler has seen its gross margin -- what it earns after subtracting all the costs of doing business -- drop to 16 percent from 21.2 percent over the past two years, according to Bloomberg Analytics.

  Over the same period, the German company's Chrysler unit has trimmed its rolling five-year capital-spending plan to US$30 billion from US$40 billion, Jolissaint said.

  When General Motors started its rebates, Chrysler's market share fell. It answered by giving purchasers as much as US$2,500 back, with the offer to expire Feb. 28. Then, after General Motors brought back no-interest loans earlier this month, Chrysler extended its rebates through March.

  "Vehicles haven't been this affordable in a quarter of a century," Jolissaint said. New car prices fell 0.9 percent in February, the biggest one-month drop in exactly 15 years, the Labor Department's report showed today. Compared with a year ago, prices were down 1.5 percent.

  General Motors this week announced a US$4.3 billion cut in spending this year to make up for low vehicle prices and increased expenses for health care. Of the amount, US$1 billion will come from capital outlays and US$2 billion from materials, which will require some price reductions from suppliers.

  Discounts helped lift US retail sales in the fourth quarter. They rose 11.3 percent at an annual rate, the strongest since the beginning of 2000.

  "This has absolutely been one of the most promotional holiday seasons on record," said Kurt Barnard, president of Barnard's Retail Trend Report. "It doesn't bode well for profits."

  "And now, retailers are trying to get back to regular pricing and they're finding that sales are sputtering."

  While Wal-Mart Stores Inc, Family Dollar Stores Inc, Ross Stores Inc and other bargain chains benefit from penny-pinching shoppers, mainstay companies such as Gap Inc and American Eagle Outfitters Inc, have less leeway.

  Gap, the largest US clothing retailer, reported its first back-to-back quarterly loss in the period that ended Feb. 2. Gap cut holiday-season prices to get rid of merchandise, including styles that put off older customers and failed to attract younger ones. Sales rose almost 10 percent at American Eagle Outfitters Inc, a casual-clothing retailer aimed at 16- to 34-year-olds. Its earnings still fell 11 percent.

  Clothing prices rose 0.5 percent in February, the Labor Department reported yesterday. The increase was the first in four months, and prices were down 3.8 percent from a year earlier.

  Gateway, the second-biggest direct seller of personal computers after Dell Computer Corp, said late last month it will have a wider first-quarter loss than analysts forecast. Computer prices last month were down 30 percent from February 2001.

  Delta said Tuesday its first-quarter loss will be as much as US$380 million amid fare-cutting by rivals such as Southwest Airlines Co. While fares rose last month, they were down 4.1 percent over the year.

  A boost in capital spending "will depend very much on our return to profitability," Chief Executive Officer Leo F. Mullin said in an interview last month. As for a resumption of spending plans that were made before the terrorist attacks Sept. 11 disrupted travel, "I think that's a good year off."
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