Retail Sales Ring Up Flat as Wary Consumers Eye Spending

Retail Sales
Mark Lennihan/AP

By Lucia Mutikani

WASHINGTON -- U.S. retail sales unexpectedly stalled in July, pointing to some loss of momentum in the economy early in the third quarter.

But with job growth holding sturdy, sales activity was likely to rebound in the coming months, economists said.

The Commerce Department said Wednesday that retail sales, which had increased 0.2 percent in June, were in part held back by a second straight month of declines in receipts at auto dealers. July's reading was the weakest since January.

%VIRTUAL-pullquote-[W]e expect this slowdown to be short-lived and we look for consumer spending to rebound strongly in the coming months.%"Given the strong gains in labor market activity, along with other indications of strengthening domestic growth momentum, we expect this slowdown to be short-lived and we look for consumer spending to rebound strongly in the coming months," said Millan Mulraine, deputy chief economist at TD Securities in New York.

Economists had forecast sales, which account for a third of consumer spending, increasing 0.2 percent last month.

The economy has experienced six consecutive months of job growth above 200,000. Layoffs and job openings are back to their pre-recession levels. Data on manufacturing and services sectors have suggested the economy was growing solidly.

Still, the pause in retail sales could give the Federal Reserve ammunition to maintain its very easy monetary policy stance for a while. The U.S. central bank has kept its benchmark overnight interest rate near zero since December 2008.

"It will provide Fed Chair Janet Yellen with some of the rationale she needs to justify why the Fed should move gradually and keep interest rates low for longer than hawks within the Fed would like," said Diane Swonk, chief economist at Mesirow Financial in Chicago.

Separately, retailer Macy's (M) cut its full-year same-stores sales forecast after second-quarter sales fell short of expectations, another cloud over the retail sector.

Macy's shares fell more than 5 percent, while shares of retailers Tiffany (TIF), Kohl's (KSS) and Nordstrom (JWN) also were down sharply.

The S&P retail index was up at midday, but lagged the broader stock index, which was trading higher as tensions in Ukraine and Iraq eased. The dollar was little changed against a basket of currencies, while prices for U.S. government debt rose.

Core Sales Barely Rise

So-called core retail sales, which strip out automobiles, gasoline, building materials and food services edged up 0.1 percent in July. These sales correspond most closely with the consumer spending component of gross domestic product.

May and June core retail sales, however, were revised lower.

%VIRTUAL-WSSCourseInline-956%That and another Commerce Department report showing non-auto retail inventories rose only modestly in June suggested the government could cut its estimate for second-quarter growth from the brisk 4 percent annual pace report last month.

JPMorgan estimated that second-quarter growth would be cut by 0.4 percentage point.

"People are just not parting with their hard-earned funds and that is a concern," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

In July, receipts at auto dealerships fell 0.2 percent after dropping 0.3 percent the prior month. Sales at non-store retailers, which include online sales, fell.

There were also declines in sales at furniture, electronics and appliances, and general merchandise stores. Receipts at clothing retailers rose as did sales at sporting goods shops and building materials and garden equipment suppliers.

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