Retail Sales in U.S. Declined for a Second Month in May

Retail sales in the U.S. fell in May for a second month, prompting economists to cut forecasts for economic growth as limited job and income gains hold back consumers.

The 0.2 percent decrease matched April’s drop that was previously reported as a gain, Commerce Department figures showed today in Washington. Sales excluding car dealerships slumped by the most in two years.

The smallest wage gains in a year and unemployment exceeding 8 percent are taking a toll on the consumer spending that accounts for about 70 percent of the economy, leaving it more vulnerable to shocks from the European crisis. Federal Reserve policy makers gather next week to decide whether further stimulus is needed to fuel the three-year-old expansion.

“The consumer is pulling back,” said Michael Brown, an economist at Wells Fargo Securities LLC in Charlotte, North Carolina, who correctly forecast the drop in sales. “There isn’t a lot of job creation. We will continue to see softer numbers.”

Stocks fell after the report and as higher borrowing costs in Italy and Germany fueled concern about the global economy. The Standard & Poor’s 500 Index declined 0.7 percent to 1,314.88 at the close in New York.

Last month’s drop in retail sales matched the median forecast of 79 economists surveyed by Bloomberg News. Estimates ranged from a drop of 0.7 percent to a gain of 0.5 percent. April and May marked the first back-to-back declines in two years.

Europe’s Economy

In the euro area, industrial production decreased for a second month in April, led by a drop in Germany and adding to signs of a deepening economic slump. Output in the 17-nation euro region declined 0.8 percent from a month earlier, the European Union’s statistics office in Luxembourg said.

Japan’s machinery orders increased more than forecast and South Korea’s unemployment fell as Asian economies showed resilience in the face of Europe’s debt crisis, other data showed.

Economists at Goldman Sachs Group Inc. reduced their tracking estimate for U.S. second-quarter gross domestic product immediately following the retail sales report, to a 1.6 percent gain from 1.8 percent. Morgan Stanley cut its projection 0.2 percentage point, to 1.8 percent, while Credit Suisse marked down GDP for the period to 2.2 percent from 2.5 percent.

Souvenir Sales

“People aren’t opening their wallets,” said Ivy Montville, who operates White House Gifts, a souvenir shop in Washington. “This year, the first quarter was good but the second quarter has been marginal. The economy just isn’t as strong as it used to be.”

The Georgetown Day Spa in Charlotte, North Carolina, has suffered an almost 50 percent drop in its massage business this year and 25 percent decline in skin care, said owner Gary Adams. Customers are also putting off haircuts and coloring, he said.

“People are waiting a little bit longer between services, going for five or six weeks maybe instead of four,” said Adams, 55, who started the business in 1998. “Everybody has been really cautious, trying to save where they can or stretch the dollar out.”

Another report today showed wholesale prices dropped in May by the most since July 2009 as energy and food costs decreased. The producer price index declined 1 percent, more than forecast, after falling 0.2 percent the prior month, Labor Department figures showed.

Fed Meeting

The Federal Open Market Committee, which sets the course of central bank policy, begins a two-day meeting on June 19. The group may address a cooling expansion, slower job growth and the financial crisis in Europe.

“Will there be enough growth going forward to make material progress on the unemployment rate?” Fed Chairman Ben S. Bernanke said in testimony last week to the Joint Economic Committee. “That’s the essential decision and the central question that we have who look at.”

Eight of 13 major retail categories showed sales declines last month, led by building materials merchants, service stations and general merchandise stores, according to today’s Commerce Department report.

Sales at automobile dealers showed an unexpected gain, in contrast to industry figures, which are the ones used to calculate GDP. They climbed 0.8 percent in May after a 0.1 percent increase the prior month.

Light Trucks

Cars and light trucks sold at a 13.7 million annual rate in May, the weakest this year and down from April’s 14.4 million pace, Ward’s Automotive Group data showed. Year-over-year gains of 11 percent at General Motors Co. (GM) and 30 percent at Chrysler Group LLC trailed analysts’ projections. Ford Motor Co. (F), the only major automaker who topped estimates with a 13 percent increase in sales, boosted incentives by about $100 per vehicle.

Retail sales excluding autos decreased 0.4 percent, the weakest performance since May 2010, today’s report showed. They were projected to be unchanged, the survey median showed.

The retail sales data, which aren’t adjusted for prices, reflected lower gasoline receipts at service stations, where demand dropped 2.2 percent in May, the most this year.

A gallon of regular fuel at the pump cost an average $3.71 in May, down from this year’s peak of $3.94 on April 4, according to AAA, the biggest U.S. auto group. It was down to $3.54 yesterday.

Clothing Stores

Spending increased 0.9 percent at clothing stores and 0.8 percent at electronics chains.

Sales excluding autos, gasoline and building materials, which are the figures used to calculate GDP, were little changed in May after rising 0.1 percent, today’s report showed. The April advance was previously reported at 0.4 percent.

Monthly employment gains have decelerated from a high this year of 275,000 in January. Payrolls rose 69,000 in May after a 77,000 increase in April, according to data from the Labor Department. The jobless rate climbed to 8.2 percent from 8.1 percent. Average hourly earnings rose 1.7 percent last month from May 2011, the smallest increase since December 2010.

Atlanta-based Home Depot Inc. (HD), the largest U.S. home- improvement retailer, is among companies projecting joblessness will remain stubbornly high.

“We will still face higher-than-normal unemployment and underemployment rates, with the consequence that value will remain of major importance to our customers,” Chief Executive Officer Frank Blake said at an analyst conference on June 6. “Growth will be moderate.”

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

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

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