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Sales, jobs data show underlying economic strength

GMC sport-utility vehicles are pictured at a dealership in Pasadena, California April 3, 2013. REUTERS/Mario Anzuoni
GMC sport-utility vehicles are pictured at a dealership in Pasadena, California April 3, 2013. REUTERS/Mario Anzuoni

By Lucia Mutikani

WASHINGTON (Reuters) - Retail sales rose more than expected in May and first-time applications for unemployment benefits fell last week, signs of economic resilience in the face of belt-tightening in Washington.

The data on Thursday suggested rising home prices and steady job gains, which hoisted consumer confidence to multi-year highs in May, was starting to create a virtuous cycle in which gains in spending were forcing employers to keep hiring.

Policymakers at the Federal Reserve have helped the process with a muscular easing of monetary policy that pushed mortgage rates to record lows earlier this year.

"The economy is showing more evidence of the positive feedback loop, particularly through the housing channel, but we still have this push and pull of monetary policy and fiscal policy," said Robert Dye, chief economist at Comerica in Dallas.

Retail sales increased 0.6 percent after edging up 0.1 percent in April, the Commerce Department said. Economists had expected sales to rise 0.4 percent.

A 1.8 percent surge in motor vehicle purchases last month helped lift retail sales, which account for about 30 percent of consumer spending. It was the largest increase in auto sales since November.

A sizable 0.9 percent gain in receipts at stores selling home-building materials also helped.

Still, so-called core sales, which strip out automobiles, gasoline and building materials, and correspond most closely with the consumer spending component of gross domestic product, increased 0.3 percent after rising 0.2 percent in April.

The data helped investors to shift attention away from an overnight rout in overseas equity markets, giving a lift to U.S. stocks. The dollar pared steep losses against the yen, while U.S. Treasury debt prices rose.

The increase in core sales offered hope consumer spending would not slow too much in the second quarter, even though it fell in April for the first time in a year.

Indeed, some economists bumped up spending forecasts. JPMorgan now expects consumer spending, which accounts for 70 percent of U.S. economic activity, to grow at a 2 percent annual pace this quarter, up from a previous forecast of 1.7 percent. Morgan Stanley raised its spending forecast by two tenths of a percentage point to a 2.3 percent rate.

Consumer spending expanded at its fastest pace in two years in the first quarter, lifting the economy to a 2.4 percent growth rate.

STEADY JOB GAINS

In a separate report, the Labor Department said initial claims for state unemployment benefits declined 12,000 to a seasonally adjusted 334,000 last week.

The data suggested that the recent pace of steady job gains continued in early June.

Taken together, the sales and jobs market data indicated a pick-up in economic momentum after a slow start to second quarter that could move the Fed closer to a decision to ratchet back on the $85 billion in bonds it has been buying each month.

Still, it was unlikely to convince the central bank to make any changes at a meeting on Tuesday and Wednesday, particularly given that the manufacturing sector is struggling.

"Even though Fed policy is more focused on the labor market, better aggregate demand news will give some comfort that solid job gains are sustainable," said Michael Feroli, an economist at JPMorgan in New York.

A second report from the Labor Department showed no sign of imported inflation, which could keep domestic price pressures subdued and the Fed cautious about removing stimulus too early.

Import prices fell in May for a third straight month, reflecting a weak global demand.

(Reporting by Lucia Mutikani; Additional reporting by Jason Lange; Editing by Neil Stempleman and Tim Ahmann)

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