Weak Retail Sales Hint at Slower Economic Growth

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Retail Sales
Danny Johnston/AP
By Lucia Mutikani

WASHINGTON -- U.S. retail sales unexpectedly fell in June as households cut back on purchases of automobiles and a range of other goods, which could raise concerns the economy was slowing again.

Tuesday's weak retail sales report, together with signs of some softening of the labor market, could dampen expectations for an interest rate hike from the Federal Reserve this year, which most economists expect could come in September.

%VIRTUAL-pullquote-The underlying tone of this report suggests that the recovery is beginning to show some signs of strain.%"The underlying tone of this report suggests that the recovery is beginning to show some signs of strain. If anything it will temper, at the margin, any consideration for a September rate hike," said Millan Mulraine, deputy chief economist at TD Securities in New York.

The Commerce Department said retail sales slipped 0.3 percent, the weakest reading since February, after May's downwardly revised 1 percent increase.

Retail sales excluding automobiles, gasoline, building materials and food services slipped 0.1 percent following a 0.7 percent gain in May. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.

Economists had forecast retail sales rising 0.2 percent last month after a previously reported 1.2 percent jump in May. Core retail sales had been expected to increase 0.4 percent.

The dollar fell against the yen and the euro after the data, while prices for U.S. Treasury debt rose. U.S. stocks were trading slightly higher on better earnings from JPMorgan Chase (JPM).

Coming on the heels of June's disappointing employment report and sharp drop in small business confidence, the weak retail sales data suggests the economy might have lost some momentum at the end of the second quarter, having struggled at the start of the year.

The economy contracted at a 0.2 percent annual rate in the first quarter and the drop in core retail sales could see economists trim their GDP growth estimates for the April-June quarter. The second-quarter growth outlook was also dimmed by another report from the Commerce Department showing retail inventories excluding automobiles rose only 0.1 percent in May.

This component, which goes into the calculation of GDP, increased 0.5 percent in April.

"Consumers are struggling this year, probably because income has been affected by weakness in the oil industry. The odds of tightening in September just diminished a bit," said Chris Low, chief economist at FTN Financial in New York.

Looming Rate Hike

Fed Chair Janet Yellen said last Friday she expected the U.S. central bank to tighten monetary policy "at some point later this year." Yellen could offer more clues on the timing of the first interest rate increase since 2006 when she testifies before lawmakers Wednesday and Thursday.

Retail sales last month were broadly weak, with receipts at auto dealerships falling 1.1 percent after rising 1.8 percent in May. Clothing stores sales dropped 1.5 percent, the largest decline since September 2014.

Receipts at building material and garden equipment stores fell 1.3 percent and sales at furniture stores declined 1.6 percent, the biggest drop since January last year.

There were also declines in sales at online stores and at restaurants and bars. Rising gasoline prices supported sales at service stations, where receipts rose 0.8 percent.

Sales at electronics and appliance stores rose 1 percent, the biggest rise since September.

A separate report from the Labor Department showed the lingering effects of a strong dollar continuing to suppress imported inflation pressures. Import prices fell 0.1 percent in June after increasing 1.2 percent in May.

Import prices have now declined in 11 of the last 12 months.

9 Numbers That'll Tell You How the Economy's Really Doing
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Weak Retail Sales Hint at Slower Economic Growth
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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