Retail Sales Up Solidly, Boosted by Vehicle Purchases

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Retail Sales
Danny Johnson/APShoppers check out at a Walmart Supercenter store in Springdale, Ark.
By Lucia Mutikani

WASHINGTON -- U.S. retail sales rebounded in July as households boosted purchases of automobiles and a range of other goods, suggesting solid momentum in the economy early in the third quarter.

The upbeat report Thursday from the Commerce Department should strengthen expectations of a Federal Reserve interest rate hike as early as next month. Although another report showed a rise in new applications for unemployment benefits last week, the trend pointed firmly to a tightening jobs market.

%VIRTUAL-pullquote-The strong retail sales report should go a long way in supporting September rate hike odds...%"The strong retail sales report should go a long way in supporting September rate hike odds as the upcoming Fed decision continues to hinge crucially on the tone of domestic economic momentum," said Cheng Chen, an economist at TD Securities in New York.

Retail sales increased 0.6 percent last month, broadly in line with economists' expectations. June's retail sales were revised up to show them unchanged instead of the previously reported 0.3 percent drop.

Excluding automobiles, gasoline, building materials and food services, retail sales rose 0.3 percent after a revised 0.2 percent gain in June. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.

Core retail sales were previously reported to have slipped 0.1 percent in June.

U.S. stocks were trading lower after the data, while the dollar rose against a basket of currencies. Prices for U.S. government debt fell.

The retail sales report added to July's fairly upbeat employment and small business confidence reports in suggesting the economy was growing at a steady clip at the start of the third quarter. GDP expanded at a 2.3 percent annual pace in the April-June quarter.

Second-Quarter Growth Likely Much Stronger

But June data on factory inventories and imports as well as upward revisions to May construction spending figures have left economists expecting that the advance second-quarter GDP growth figure could be raised to at least a 3 percent pace.

The upward revisions to June core retail sales also boosted the second-quarter growth estimate. A second report from the Commerce Department showing a 0.8 percent jump in business inventories in June also suggested that growth in the last quarter was stronger than initially estimated.

The government will publish its second GDP growth estimate later this month. Given the steadily firming economy, many economists expect the Fed will raise its short-term lending rate in September for the first time in nearly a decade.

Financial markets, however, have shifted their rate hike expectations toward December following China's devaluation of its currency this week.

In a separate report, the Labor Department said initial claims for state unemployment benefits increased 5,000 to a seasonally adjusted 274,000 for the week ended Aug. 8.

Though claims have risen for three straight weeks, they have for 23 consecutive weeks remained below the 300,000 threshold, which is associated with a firming jobs markets.

The four-week moving average of claims, considered a better measure of labor market trends as it irons out week-to-week volatility, fell 1,750 to 266,250 last week, the lowest level since April 2000. The tightening labor market is steadily lifting household income, which is supporting consumer spending.

"We view today's retail sales report as consistent with our premise that rising employment levels support the expectation of healthy consumer spending in the second half of the year," said Anthony Karydakis, chief economic strategist at Miller Tabak in New York.

Retail sales last month rose in most categories, with receipts at auto dealerships increasing 1.4 percent after falling 1.5 percent in June. There were also increases in sales at clothing, building materials and garden equipment, furniture and online retailers, as well as at restaurants and bars.

Receipts at sporting goods and hobby stores rose 0.9 percent, but sales at electronics and appliance stores fell 1.2 percent.

9 Numbers That'll Tell You How the Economy's Really Doing
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Retail Sales Up Solidly, Boosted by Vehicle Purchases
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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