Cooling Sales Curb Optimism on U.S. Growth Rebound: Economy

American consumers paused for breath in May as retail sales climbed less than forecast following an impressive three-month run, tempering forecasts for a rebound in growth this quarter.

The 0.3 percent increase in purchases last month fell short of the median estimate of economists surveyed by Bloomberg that projected a 0.6 percent advance, Commerce Department figures showed today. Receipts for April were revised up to cap the strongest three months in almost two years.

The slowdown in demand last month prompted some economists to shave forecasts for second-quarter gross domestic product just as reports this week signaled the economy slumped at the start of the year even more than previously estimated. Other data today showing consumer confidence is firming and the job market is healing brighten the outlook for the rest of 2014.

“It’s a story of gradual improvement,” said Michelle Girard, chief U.S. economist at RBS Securities Inc. in Stamford, Connecticut, and the second-best forecaster of retail sales over the past two years, according to Bloomberg data. “We’re not getting the big acceleration that many people hoped for.”

Stocks retreated, with the Standard & Poor’s 500 Index falling for a third day, as investors reacted to the disappointing data and rising tension in Iraq. The S&P 500 declined 0.7 percent to 1,930.11 at the close in New York.

Gaining Confidence

Consumers’ spirits are rising as job prospects strengthen. The Bloomberg Consumer Comfort Index rose to a five-week high of 35.5 in the week ended June 8, another report today showed. A gauge of the state of the economy increased to a six-week high, while measures of personal finances and whether it’s a good time to spend also advanced.

“The most important of all economic indicators is employment, and since the jobs picture has improved, consumer attitudes are more upbeat,” said Richard Yamarone, a senior economist at Bloomberg LP in New York. “If sustained, this could result in greater spending and overall economic growth.”

Sentiment is also being underpinned by limited dismissals as companies find demand is strong enough to maintain headcounts. A report from the Labor Department today showed applications for jobless benefits held below this year’s average, rising by 4,000 to 317,000 last week. Claims so far in 2014 have averaged around 324,000.

Retail sales estimates in the Bloomberg survey of 83 economists ranged from gains of 0.2 percent to 1 percent. The Commerce Department revised April figures to show a 0.5 percent gain rather than the previously reported 0.1 percent increase.

Three-Month Gain

Receipts climbed 2.9 percent from February through April, the strongest three-month gain since July to September 2012.

Six of 13 major retail categories showed increases last month, indicating the advance wasn’t broad-based, today’s Commerce Department report showed. Auto dealers were among those showing the biggest sales advance in May. Purchases at gas stations also picked up, reflecting higher fuel costs.

Excluding those two categories, purchases were unchanged after a 0.3 percent increase in April that was previously estimated as a 0.1 percent drop.

Job gains are giving more American households the means to shop. The economy added 217,000 positions in May after a 282,000 gain the prior month.

“The incoming U.S. indicators are consistent with the substantial rebound in growth for the current quarter,” Emily Kolinski Morris, senior U.S. economist at Dearborn, Michigan-based Ford Motor Co., said on a sales call on June 3. “Recent readings on housing have improved slightly and the labor market continued its gradual recovery.”

Auto Sales

Industry figures showed demand surged in May, with purchases of cars and light trucks reaching a 16.7 million annualized pace, the highest since February 2007.

Core sales, the figures that are used to calculate GDP and exclude such things as autos, gasoline stations and building materials, were unchanged last month after a revised 0.2 percent increase in April. The prior month was previously reported as a 0.1 percent drop.

Economists at Macroeconomic Advisers in St. Louis cut their growth forecast for this quarter to 3.7 percent from 3.8 percent after the sales report. Their tracking estimate for the first quarter showed a 2.1 percent rate of contraction, which would be the worst performance since the first three months of 2009, when the economy was still in a recession.

The figures for the first three months of the year have deteriorated since a Census Bureau report yesterday showed spending on health-care services dropped last quarter compared with the gain currently estimated.

Finances Mending

Mending finances may prompt households to sustain purchases into the second half of the year. Property values in 20 U.S. cities increased 12.4 percent in March from the same month in 2013, according to an index from S&P/Case-Shiller on May 27. Stock prices have also climbed, helping those who own financial assets.

“Homeowners increasingly believe that improvements made to their homes will increase their value, and consumers’ views around personal finances continue to improve,” Robert Niblock, chief executive officer, said in a May 21 Lowe’s Cos. earnings call. “Performance has already improved in May.”

Even so, recent gains have benefited wealthier consumers more than others -- bad news for lower-end retailers.

Worse-off customers have faced tepid earnings gains. Wages posted a 2.1 percent year-over-year increase in May, near the average for the last four years. Consumer prices climbed 2 percent in the 12 months ended in April, which means incomes merely kept up with inflation.

Wal-Mart Stores Inc. is “dealing with the structural changes that are happening in the marketplace,” William S. Simon, Wal-Mart U.S. chief executive officer, said in a June 6 call. “Our income segments remain challenged.”

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