Rate cut weak medicine for consumer ills

CHICAGO (Reuters) - The largest U.S. rate cut in more than 23 years will provide little actual relief for consumers who have seen their wealth hit by a one-two punch of plunging home prices and a falling stock market.

That could keep pressure on the shares of companies that cater to consumers, such as restaurants, and could also hurt investors who have been moving back to retailers in recent days in the hope the worst is over for those stocks, analysts said.

"Overall, the consumer is completely underwater and we're nowhere near the bottom," said Howard Davidowitz, chairman of New York-based consulting firm Davidowitz & Associates Inc.

Consumer spending, which accounts for about 70 percent of the U.S. economy, has been hurt over the past half year or more as rising fuel and food prices have added to the housing and financial market woes.

The Federal Reserve tried to give a boost to the economy on Tuesday with a 75-basis-point cut in the fed funds rate in a rare move between meetings of the policy-making Federal Open Market Committee.

That move came as lawmakers were talking about enacting a fiscal stimulus package that could include tax rebates to help lift an economy that has shown increasing signs of weakness.

Still, those measures might have limited impact.

"I think there's still very little recognition of the enormousness of the problem here," said Dean Baker, co-director of the Center for Economic and Policy Research, an independent Washington-based think tank, citing the trillions of dollars in lost wealth from sliding stocks and home values.

That means retail stocks -- up 6 percent since January 11 as measured by the Standard & Poor's retail index .15GSPMS -- may be getting well ahead of any actual recovery.

Among factors weighing against retail stocks are weak financial markets, the bursting housing bubble, consumers with too much debt and too little savings and overly optimistic earnings estimates and valuations, Credit Suisse retail analyst Michael Exstein said in a note.

Other analysts counter there are bargains in retail stocks, as long as investors take a long-term outlook.

"I think they are extraordinarily cheap for the most part. If you pick your place in retailing, you can do extraordinarily well," said Patricia Edwards, portfolio manager at investment management firm Wentworth, Hauser and Violich. Among the stocks she cited were Nordstrom Inc, Target Corp and Wal-Mart Stores Inc.

SIGNS OF WEAKNESS

The 2007 holiday season was the worst for retailers in five years, with sales up only 3 percent from a year earlier, the National Retail Federation said last weak.

Major automakers also reported a slide in December sales, closing out their worst year in over a decade.

Those weak signs of consumer spending have some analysts saying the U.S. economy is already in a recession and, while many retailers' shares were higher on Tuesday, analysts thought the rate cut would, at best, help consumers feel better.

"We wake up this morning and we hear the market is supposed to be down about 500 points. Then we also know intuitively that when they reduce the rate, it's typically good for the stock market," said Mark Montagna, retail analyst for CL King & Associates in New York. "Maybe it will be more of a psychological benefit to consumers and boost their confidence to not pull back as much."

But even if the rate cut and a stimulus package help consumers, it will likely take some time.

"This has to work its way through the financial system and through business before it works its way back to the consumer," said Michael Niemira, chief economist for the International Council of Shopping Centers.

Tax rebates could provide more immediate relief, especially at discount retailers such as Wal-Mart, whose customers are more likely to live paycheck-to-paycheck, analysts said.

But while those payments might also help the ailing restaurant sector for a month or two, the boost would be short- lived, analysts said.

"I think its a near-term patch," said Matt DiFrisco, restaurant analyst Thomas Weisel Partners in New York. "They'll burn through that pretty quickly. It's a couple of months of same-store-sales gains."

(Additional reporting by Martinne Geller, Justin Grant and Lisa Baertlein; Editing by Andre Grenon)