US rate watchers mind the Gap

Forget producer prices and the welter of data about the unemployed - the best sign that the US stock market is heading for a downturn could be that Americans are not buying enough chinos and T-shirts.

Analysts pouncing on every scrap of economic information for signs that the Federal Reserve Board will raise rates at the end of this month have been keenly watching the share price of Gap, uniform provider for the American people. Wendy Liebman, president of WSL Strategic Retail, said yesterday: "Where Gap goes, so goes America. It took over from Levis as the litmus test some time ago."

Although retail companies in general offer important evidence of consumer confidence, Gap clothes have come to symbolise the casual nature of American life. It provides a uniform for schoolchildren to economic professors from its 2,600 stores around the world.

But the company's stock market performance has also offered a warning bell for falls in the broader US market over the past 12 years. James Cramer, a hedge fund manager, pointed out in the New York Observer this week that shares in Gap fell sharply in 1987, 1990 and 1994, just before correspondingly awful declines in the New York stock exchange. In the two months leading up to the October crash of 1987, Gap shares lost more than half of their value.

"It has been a perfect lead indicator. If you sold the market when it broke, you avoided some hefty losses," said Mr Cramer. The shares fell after the company reported July store-for-store sales figures which disappointed analysts.

But not all observers share Mr Cramer's bleak outlook and the fluctuations of the stock market in the run-up to the next Fed meeting have been reflected in Gap's share price. Only yesterday the stock rose more than $3, or 8%, to 40 15/16 in early morning trading after positive economic figures.