A day after the Federal Reserve announced aggressive new stimulus, a broad set of mixed economic data out Friday pointed to the potential costs and benefits of the central bank's move.
Fed Chairman Ben Bernanke said Thursday that tens of billions of dollars in additional bond buying each month could help Main Street as well as Wall Street via the wealth effect.
Higher home and stock prices fueled by so-called quantitative easing, or QE, make consumers feel wealthier, giving them confidence to buy things, he said.
Stocks' recent run-up may have helped the University of Michigan's consumer sentiment index, which climbed to 79.2 in September from 74.3 in August.
More confident consumers are needed to lift shaky retail sales. A measure of core sales that excludes volatile categories like fuel was flat in August vs. July.
Spillover effects of the slowly mending housing market were evident in retail sales data. Building material sales were up 1% last month after rising 1.2% in July. Furniture sales rose 0.3%. The Fed's mortgage bond buys could lift housing further.
Electronics was the weakest retail sector in August, but it is expected to regain momentum with the release of new Apple (AAPL) iPhones and iPods. A new iPad is anticipated next month.
More consumer demand would provide a boost for manufacturers, which have been grappling with lower export orders caused by slowdowns in China, Europe and Latin America.
Other new data Friday showed that industrial output dropped 1.2% in August from July, the steepest monthly decline since early 2009. Factories, mines and utilities all produced less.
Production fell 1.2% in consumer goods, 0.8% in machinery and 0.2% in business equipment.
But the latest fuel price spike threatens consumer confidence and spending. Previous rounds of Fed stimulus have coincided with jumps in oil, and the latest plan could push it up higher.
Consumer prices saw the biggest rise in more than three years last month, echoing Thursday's wholesale price data. Energy prices leapt more than 5% vs. July.
Excluding food and fuel, consumer prices changed little from July, but the earnings erosion caused by higher overall inflation hurts spending power. Real hourly earnings last month fell 0.7%, the most since June 2009.
The Fed's first two QE rounds had a "mild to moderate" wealth effect, Comerica Chief Economist Robert Dye said. In this third round, a stock rally would coincide with a housing recovery, which was missing before.
A strong housing market can lift spending, manufacturing and residential construction jobs, he said. "It adds to the economic momentum.
But the connection between asset-price rallies and gains in the broader economy is circuitous and therefore tenuous, said Jack Ablin, chief investment officer with Harris Private Bank.