U.S. retail sales weak; labor market strengthening

By Lucia Mutikani

(Reuters) - U.S. retail sales unexpectedly fell for a third straight month in February likely as harsh weather kept consumers from automobile showrooms and shopping malls, which could hurt growth prospects for the first quarter.Snowy and cold weather and the now-settled labor dispute at the country's West Coast ports, which disrupted the supply chain, hurt economic activity early in the year. The persistent weakness in retail sales could temper expectations for a June interest rate hike from the Federal Reserve.

"The broad-based weak tone of this report suggests that the bad winter weather may have been a key factor in tempering economic activity this quarter," said Millan Mulraine, deputy chief economist at TD Securities in the New York.

The Commerce Department said on Thursday retail sales dropped 0.6 percent as receipts fell in almost all categories. Sales had declined 0.8 percent in January.

It was the first time since 2012 that sales had dropped for three consecutive months. Economists polled by Reuters had forecast retail sales increasing 0.3 percent last month. Bad weather blanketed the country in the second half of February.

The Fed had been widely expected to remove a reference to being "patient" in deciding when to raise rates at next week's meeting, putting a June rate increase in play.

Some economists and traders think the U.S. central bank may want to wait longer to be certain any weakness early in the year was temporary.

U.S. stock stocks opened higher on the data. The dollar extended losses against a basket of currencies, while prices for U.S. Treasury debt rose.

WEAK REPORT

Retail sales excluding automobiles, gasoline, building materials and food services were unchanged after a 0.1 percent dip in January.

The so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.

The second straight month of weakness in the core reading since the start of year suggests a marked slowdown in consumer spending in the first quarter after the fourth quarter's surge.

Economists had expected core retail sales would rise 0.4 percent. February's weak retail sales reading together with another report from the Commerce Department showing flat business inventories in January could see economists cut their first-quarter GDP growth estimates.

First-quarter growth forecasts currently range between an annualized pace of 1.7 percent and 2.5 percent. The economy grew at a 2.2 percent pace in the fourth quarter.

The slowdown in growth, however, is seen temporary against the backdrop of a rapidly firming labor market.

A separate report from the Labor Department showed initial claims for state unemployment benefits declined 36,000 to a seasonally adjusted 289,000 for the week ended March 7.

That was well below economists' expectations for a drop to 305,000 and unwound much of the prior two weeks' increases, which had pushed claims well above the 300,000 mark. Harsh weather caused volatility in claims for much of this year.

The strengthening labor market offers confidence that economic activity will accelerate in the second quarter of the year, also as consumer spending gets a tailwind from the massive savings from the lower gasoline prices in late 2014 and early this year.

Economists say consumers saved the bulk of the windfall from cheaper prices at the pump and expect the money to be spent during the course of the year.

"Consumers may have throttled back spending, but they maintain the ability and means to spend," said Jack Kleinhenz, chief economist at the National Retail Federation in Washington.

"With the onset of warmer, spring-like temperatures and an earlier Easter, consumers will likely shake off the winter chills."

In February, automobile sales tumbled 2.5 percent, the largest drop in a year. Sales at clothing stores were flat. Receipts at building material and garden equipment stores fell 2.3 percent, the biggest decline since May 2012.

Sales at restaurants and bars slipped 0.6 percent, the largest fall in a year. There were also declines in furniture and electronic and appliances sales.

Receipts at online stores, however, rose as did sales at sporting goods and hobby shops.

A recent rise in gasoline prices lifted receipts at service stations, where sales rose 1.5 percent, the first increase since May. Gasoline prices rose about 9 cents in February.

Prices at the pump had been dropping since July last year in tandem with falling crude oil prices.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)