Rise in Consumer Spending Signals Faster Economic Growth

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Jaime Henry-White/AP

By Jason Lange

A gauge of U.S. consumer spending rose in July at its fastest pace in seven months, a sign of quicker economic growth that could strengthen the case for the U.S. Federal Reserve winding down a major economic stimulus program.

Other data Tuesday showed U.S. small business optimism improving in July, while import prices rose less than expected during the month and inventories at U.S. businesses were flat in June.

Retail sales outside of cars, gasoline and building materials rose 0.5 percent last month, the Commerce Department said. That reading is a key component of the department's measure of consumer spending, which drives the U.S. economy.

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July's gain in core retail sales was the largest since December, and suggests the economy could be regaining steam after tax hikes and federal budget cuts dragged on growth in the first half of the year.

"Households may be spending a bit more freely in response to the recent gains in employment," said Paul Dales, an economist at Capital Economics in London.

Economists polled by Reuters had expected the core measure of retail sales to increase a more modest 0.3 percent. Overall retail sales rose 0.2 percent, just below analysts' forecasts.

Fed Chairman Ben Bernanke said last month that the U.S. central bank could begin reducing monthly bond purchases, which are aimed to lower borrowing costs and boost employment, by the end of the year. The Fed currently buys $85 billion a month in long term bonds, a program known on Wall Street as QE, or quantitative easing. Many economists expect the Fed to begin tapering next month.

"Today's number [for retail sales] should keep the Fed on track to curtail quantitative easing purchases in September," said Joseph Trevisani, chief market strategist at WorldWideMarkets in Woodcliff Lake, N.J.

Yields on government debt rose following the data, a sign that investors believed that the chance of the Fed tightening policy had increased. U.S. stock prices fell.

In July, sales jumped 0.6 percent at U.S. department stores, the biggest gain since March 2012. Sales also posted strong gains at health and personal goods stores. Sales of motor vehicles fell 1 percent during the month.

In a further sign that economic activity could accelerate in the second half of the year, a survey from the National Federation of Independent Business showed sentiment improved among small business owners in July.

However, the Commerce Department said in a second report that retail inventories outside of the auto sector unexpectedly fell in June, which suggests that second quarter economic growth might have been a little weaker than the 1.7 percent annual rate reported last month. Overall inventories were flat.

While U.S. consumers have been stung by higher gasoline prices this year, the Labor Department said prices for overall imports rose 0.2 percent, missing analyst expectations for a stronger gain. This suggests little inflationary pressure coming from abroad.

An increase in the cost of petroleum was offset by the biggest drop in the price of non-petroleum goods in nearly 4½ years.