By and  on May 3, 2006

WASHINGTON — Although gas pump price shock is generating outrage and calls to ease the burden, business professors at top universities said rising fuel costs will influence but not dominate the complex mosaic that determines how U.S. consumers spend.

In the retail world, stores use broad product assortments and expertise in identifying waste to help lessen the impact of higher fuel prices — one of many challenges facing the still robust economy.

The economic playing field includes growing trade imbalances and a rising federal deficit being fueled by the costs of the Iraq war. The potential for terrorism looms over the economy, and there are concerns about health care costs and long-term Social Security solvency.

In addition, there is a widening gap between rich and poor, home prices in some regions are cooling, and China and India are becoming strong economic rivals. All this is happening even as the unemployment rate in March was 4.7 percent, matching the lowest level since July 2001, and the Dow Jones Industrial Average finished April at 11,367.14, for a 6.1 percent gain this year.

"Consumer credit eases momentary, short-term impacts because people can borrow against the future,'' said Stephen Hoch, professor of marketing and director of the Baker Retailing Initiative at the University of Pennsylvania's Wharton School. "Now that doesn't necessarily mean they're always smart in the way they borrow against the future. If that [gas prices] makes any impact...it probably would be very difficult to even notice it because it's one thing out of a zillion other things that are going on."

In retailing, the strain of gas costs is felt most by stores like Wal-Mart and Target that target the lower-income consumer, but the full effects will likely take weeks or months to assess. Still, strategies intended to soften the blow had Wal-Mart president and chief executive officer H. Lee Scott feeling optimistic.

Wal-Mart has adjusted its merchandising and operational plans in recent years and has touted initiatives in apparel, electronics and home decor that are intended to draw higher-income shoppers. The company's mantra at its media conference last month was customer value, not simply low price.

"Even with high fuel prices, we should have a good, stable year at Wal-Mart," Scott said during the conference.Gas prices surged to an average of $2.92 per gallon for regular this week, compared with $2.55 a month ago and $2.24 a year ago, according to the American Automobile Association.

As energy use and car purchases increase in China, "you can pretty simply extrapolate that we've got high oil prices to stay," said Campbell Harvey, professor of international business at Duke University's Fuqua School of Business.

The impact might come down to how much of the feel-good factor those prices take away from the consumer.

"It's more a psychological thing than a truly economic one," said Catherine Langlois, associate professor at Georgetown University's McDonough School of Business. "For the people who do a lot of the consumption, [the gas price] probably doesn't represent a huge amount relative to the interest payments...or the mortgage payments they make."

When making the case for his agenda, President Bush points regularly to the low unemployment rate, and a 3.5 percent increase in the gross domestic product last year. The rise in GDP came after a 4.2 percent advance in 2004, following three years of slower growth.

Still, the economy faces problems, including a U.S. budget deficit of $319 billion in fiscal 2005, down from $413 billion the previous year, but a stark departure from the surpluses of the late Nineties.

"The deficit is really due to two factors: one is the president's tax cuts and the second is the war," said Harvard economics professor Benjamin Friedman, an economic policy expert.

Beyond the deficit, "the long-run situation is one of a lot of pressure on the spending area, where we have built-in expansions of Social Security and Medicare," said J. Fred Giertz, professor of economics at the University of Illinois, a specialist in public finance and regional economic development.

The pressure on these programs will increase as the Baby Boomers age and begin to cope with more medical issues and retirement. Retailers relying on the demographic will also succeed or fail based on how comfortable the Boomers are making discretionary purchases.

As the economy has expanded, prosperity has been uneven. Household incomes for the top fifth of earners shot up 43.1 percent for the 10 years through 2004; for the lowest fifth, they rose 33.1 percent, according to the Census Bureau."We have a system where the gap between winners and losers is becoming larger," said Philip Powell, associate professor of economics and public policy at Indiana University's Kelley School of Business. "That is a public policy issue because crime rates can go up, you can have more political instability.... There are costs to inequality."

Part of the gap, though, reflects stronger incentives for the rich to worker harder, said Fabrizio Perri, assistant professor of economics at New York University's Stern School of Business, who focuses on international macroeconomics, business cycles and inequity.

"The rich are getting richer, but the poor are not getting poorer," Perri said. "The poor are getting richer, too, only at a lower rate."

Debt is a major obstacle for consumers as well as the federal government — in the form of credit card debt, mortgages and car loans, and exacerbated by poor saving habits.

If housing prices drop, over the next few years that debt will weigh more heavily.

"The home as the country's piggy bank is behind us now," said Edward Leamer, director of the UCLA Anderson Forecast. "Most people are going to feel their home equity decline some."

That means consumers will have fewer refinancing dollars to spend and will lose the comfort of seeing the value of their homes appreciate greatly. The housing surge that has helped propel the economy, picking up where the Internet boom left off, has no apparent heir.

"You look around and you try to find out where is there going to be a driver that's going to pull the economy forward, and there isn't one," Leamer said. "We're going to move into a period of much weaker economic growth."

Keeping momentum is a focus of the Bush administration.

"What's really important here is that we keep growth up and that's how you're going to keep the virtuous cycle going of business start-ups and expansion, job creation and job mobility," said Frank Lavin, undersecretary for international trade at the Commerce Department.

Apparel manufacturers and retailers are well suited to meet the challenges. U.S. retailers benefit from the world's most efficient supply chain and logistics network, and manufacturers are already used to operating globally, Lavin said."The apparel-textile sector might be arguably the most internationalized sector we've got, which I think is very good news for the industry," said Lavin, noting how it is common for firms to design and fund fashions from the U.S. that are then made abroad.

However, there is concern that the Federal Reserve will continue raising interest rates to forestall inflation. The benchmark federal funds interest rate got a quarter-point bump to 4.75 percent last month and may rise another quarter-point after Fed board members meet on May 10.

Rising fuel prices have been the primary conflict between ocean freight carriers and importers in the last year or so.

The Transpacific Stabilization Agreement, a conglomerate of 12 major shipping lines that negotiates rates from Asian ports, announced Jan. 26 that its members would start adjusting fuel surcharges on a monthly basis rather than quarterly. Carriers generally apply two fuel surcharges — one for marine bunker fuel and a second to account for diesel fuel used by trucks and trains that transport goods between the ship and port.

"Fuel prices have been so volatile in recent months that the lag time between collection of fuel price data and quarterly surcharge adjustments had made it difficult for shippers to plan their costs and for carriers to recover theirs," Albert A. Pierce, executive director, said in the statement.

The first monthly adjustments went into effect on Monday, setting a $590 surcharge per 40-foot container, $179 inland fuel surcharges per container and $52 per container for short-haul regional transportation.

Sara Mayes, president of the Fashion Accessories Shippers Association, said many of the 100 members of the group were completing contracts with ocean carriers.

"Our members, generally importers, are paying through the nose on trucking and air freight, not to mention their own personal fuel costs," Mayes said. "We're doing our utmost to keep overall shipping costs at the level they were at last year."

Economists said now is the time to address some chronic problems.

"During the relatively good times, that is when you have the opportunity to fix some of your longer-term problems," said Michael Brandl, a lecturer in economics at the McCombs School of Business at the University of Texas at Austin, whose research focuses on economic development.He pointed to education, which academics agree needs more attention if Americans are to remain competitive.

"Now is the time when we need to start thinking about what we do with the 72 percent of the American population over 25 years old that does not have a bachelor's degree," he said.

The U.S. also has to contend with worker displacement caused by globalization, a point made by textile mill executives who have seen their workforces shrink. Labor advocates argue manufacturing workers aren't moving up the employment ladder to high-tech jobs when they're laid off because they lack the appropriate skills.

Mindful of the pain involved for certain people and sectors when globalization realigns employment, economists said the ability to make such workforce changes remains an overall strength for the U.S.

In the end, it's the flexibility of businesses that has many of the professors placing their faith in the U.S. economy and not the government.

"It's not monetary and fiscal policy that creates growth, it's markets and people, and the policy can get in the way," said Alan Beckenstein, professor of business administration at the Darden School of Business at the University of Virginia, whose focus includes national industrial policy and global competition. "Fundamentally, the actors in the U.S. economy are strong."

Economic Snapshot:

GDP Growth
Fiscal 2005: 3.5 percent
Fiscal 2004: 4.2 percent

Federal Budget Deficit
Fiscal 2005: $319 billion
Fiscal 2004: $413 billion

Unemployment Rate
March 2006: 4.7 percent
March 2005: 5.1 percent

Trade Deficit
2005: $726 billion
2004: $617 billion

Sources: U.S. Commerce and Labor Departments

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