U.S. Economy: Retail Sales Unexpectedly Fell in May

Sales at U.S. retailers unexpectedly dropped in May for the first time in eight months, indicating the rebound in consumer spending is cooling as Americans boost savings.

Purchases fell 1.2 percent, led by a record plunge in demand at building-material stores that may reflect the end of a government rebate on sales of energy-saving appliances, according to figures from the Commerce Department issued today in Washington. Another report showed consumer sentiment climbed this month to the highest level in two years.

Growing incomes may be helping lift Americans’ confidence, while a slowdown in hiring and unemployment hovering near a 26- year high means employees will put away the extra money in their paychecks. Discounters Target Corp. and TJX Cos. were among merchants that reported gains in May sales, indicating households are looking for bargains.

“It’s unreasonable to expect rapid spending growth in this environment,” said Zach Pandl, an economist at Nomura Securities International Inc. in New York. “Businesses are being cautious about hiring. We have a huge amount of ground to cover to make up for the jobs lost during the recession.”

Stocks rose as technology shares climbed after National Semiconductor Corp.’s sales forecast beat estimates. The Standard & Poor’s 500 Index rose 0.4 percent to close at 1,091.6, capping the biggest weekly gain since March. Treasury securities rose, sending the yield on the benchmark 10-year note down to 3.23 percent at 4:36 p.m. in New York from 3.32 percent late yesterday.

Forecast to Increase

Retail sales were projected to increase 0.2 percent, according to the median estimate of 76 economists in a Bloomberg survey. Forecasts ranged from a decline of 0.7 percent to a gain of 1 percent. The Commerce Department revised in increase in April purchases up to 0.6 percent from a prior estimate of 0.4 percent.

The decrease in demand wasn’t broad-based, with five of 13 major categories showing declines last month, led by a 9.3 percent plunge at building-material stores. That drop last month followed an 8.4 percent jump in April and a gain in March that may have reflected a surge in appliance sales propelled by a provision of the government’s stimulus package last year that provided rebates for purchases of more energy-efficient products.

Looking past the month-to-month wiggles, the numbers “signal still-decent spending growth,” Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, said in a note to clients. “The growth in household labor income and the ongoing improvement in consumer sentiment should lend support to continued growth in real consumer spending.”

Sentiment Improves

The Thomson Reuters/University of Michigan preliminary index of consumer sentiment increased to 75.5, the highest since January 2008, from 73.6 in May. The gauge was projected to rise to 74.5, according to the median forecast in a survey of 65 economists.

The figure shows the slump in stock prices sparked by Europe’s debt crisis is having limited effect on sentiment.

“Confidence is up despite the turmoil in the markets recently,” said Jim O’Sullivan, global chief economist at MF Global Ltd. in New York. “Wage income and spending power have been accelerating, which perhaps helps explain why the confidence numbers are positive.”

The University of Michigan gauge of current conditions, which reflects Americans’ perceptions of their financial situation and whether it is a good time to buy big-ticket items such as cars, rose to 82.9 in June, the highest since March 2008.

Spending Outlook

The index of consumer expectations for six months from now, which more closely projects the direction of consumer spending, increased to 70.7, the highest since September, from 68.8.

The retail sales figures were also depressed by a 3.3 percent drop at service stations, which may reflect lower gasoline prices. Demand at clothing and general merchandise stores also fell.

Sales at Target, the second largest U.S. discount retailer, rose 1.3 percent in stores open at least a year from a year earlier.

“Comparable-store sales were somewhat below our expectation,” said Gregg Steinhafel, chief executive officer of Target, in a statement May 19. “Our recent experience reinforces our belief that we will continue to experience volatility in the pace of economic recovery.”

Excluding autos, gasoline and building materials, which are the figures used to calculate gross domestic product, sales increased 0.1 percent after a 0.2 percent April decrease.

Jobs, Incomes

Companies added 41,000 workers to payrolls in May, the fewest in four months and down from a 218,000 increase in April, the Labor Department reported last week. Nonetheless, employers boosted hours and average earnings, signaling workers pocketed the gains in incomes to either pay down debt or boost savings last month.

Consumer spending grew at a 3.5 percent annual pace in the first three months of 2010, the best performance in three years, according to figures from the Commerce Department. Economists surveyed this month projected purchases will expand at a 3 percent rate this quarter and 2.6 percent in the second half of the year.
(Source:Bloomberg)