Retail Sales in U.S. Climb Most in Four Months Even as Confidence Declines

Retail sales in the U.S. climbed in July by the most in four months, showing consumers were holding up at the start of the third quarter.

The 0.5 percent increase reported by the Commerce Department in Washington today followed a 0.3 percent gain in June that was larger than previously estimated. Another report showed that sentiment plunged this month amid stock-market declines and the threat of a default on the national debt.

Shares of consumer discretionary companies that are most sensitive to economic swings, like auto dealers, restaurants and hotels, advanced as the report eased concern the two-year recovery was faltering. Further gains in household spending may be restrained by lack of job growth and uncertainty over the outlook for the economy.

“The consumer is incredibly resilient and continues to struggle to maintain at least a minimum level of consumption,” said Lindsey Piegza, an economist at FTN Financial in New York. “Lingering weakness in the labor market as well as the recent turmoil in equity markets will put additional pressure on consumers in August.”

The Standard & Poor’s 500 Index rose 0.5 percent to 1,178.81 at the 4 p.m. close in New York, capping a week of record swings. The S&P Consumer Discretionary Index, which includes companies like Ford Motor Co. and Walt Disney Co., advanced 1.2 percent. Treasury securities also climbed, sending the yield on the benchmark 10-year note down to 2.24 percent from 2.34 percent late yesterday.

The increase in sales matched the median forecast of 81 economists surveyed by Bloomberg News. Estimates for the ranged from 0.1 percent to 1.5 percent.

Sentiment Plunges

The Thomson Reuters/University of Michigan preliminary index of consumer sentiment for August slumped to 54.9, the lowest reading since May 1980, from 63.7 the prior month. The gauge was projected to decline to 62, according to the median forecast in a Bloomberg News survey.

The biggest one-week slump in stocks since 2008 and the threat of default on the nation’s debt may have exacerbated consumers’ concerns as unemployment hovers above 9 percent and companies are hesitant to hire.

“The mood is very depressed,” said Chris Christopher, an economist at IHS Global Insight Inc. in Lexington, Massachusetts. “Consumers are very fatigued and very uncertain. In the short term, people are going to pull back on spending.”

The sentiment index in August was down almost 16 points from the average over the prior 12 months. Such declines are a “strong -- although not foolproof -- signal for a downturn in the U.S. economy,” Ryan Wang, an economist at HSBC Securities USA Inc. in New York, wrote in a note to clients.

‘Recession Watch’

Since 1986, a drop of 15 points or more only registered one false signal, in 2005 when Hurricane Katrina ravaged New Orleans. “The recession watch is definitely on,” Wang said.

Nine of 13 major retail categories showed a gain in sales last month, led by electronics stores, furniture retailers, auto dealers and service stations, the report from the Commerce Department showed.

Excluding autos, gasoline and building materials, which are the figures used to calculate GDP, sales rose 0.3 percent after a 0.4 percent gain the prior month.

Auto sales showed a 0.4 percent increase. Cars and light trucks sold at a seasonally adjusted pace of 12.2 million in July, up from 11.4 million in June yet trailing the 12.5 million average pace through the first half, Autodata Corp. data earlier this month showed. Deliveries at Detroit-based General Motors Co. (GM) climbed 7.6 percent from the same month in 2010.

Gradual Recovery

“Although the economy has clearly lost some momentum, we do believe that it will continue to recover, but more gradually than we had originally anticipated as we move through the second half of the year,” Don Johnson, GM’s vice president of U.S. sales, said on an Aug. 2 conference call. Moderating gasoline prices have “provided some needed relief to consumers.”

Retailers, including Macy’s Inc. (M) and Limited Brands Inc., reported July sales that exceeded analysts’ estimates. Purchases at Macy’s rose 5 percent, surpassing the 4.4 percent average projection compiled by Retail Metrics Inc. Limited, operator of the Victoria’s Secret chain, posted a gain of 6 percent from a year earlier.

The economy expanded at a 1.3 percent annual rate in the second quarter of 2011, less than forecast, from a 0.4 percent pace in the first three months of the year, Commerce Department figures showed last month. Household spending rose at 0.1 percent pace in the second quarter, the weakest since the same period in 2009.

Fed Action

Fed policy makers on Aug. 9 said economic growth this year had been “considerably slower” than expected. What’s more, “temporary factors,” including Japan’s disaster and high fuel costs, likely accounted for “only some of the recent weakness in economic activity,” they said.

They announced that they would hold their benchmark lending rate near zero at least through mid-2013 to spur the economy.

William C. Dudley, president of the Federal Reserve Bank of New York, said today he has lowered his outlook for economic growth in the second half of the year. “Household spending has flattened out, and the housing sector is depressed,” Dudley said in a speech in New York.

The labor market is struggling. The economy added 117,000 jobs in July, bringing the average gain in payrolls over the past three months to 111,000, a Labor Department report showed Aug. 5. That was about half the 204,000 increase on average in the first four months of the year.

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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