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Strong US retail sales improve economy’s fortunes

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WASHINGTON: US retail sales increased in May and sales for the prior month were revised higher, suggesting a pick-up in consumer spending that eased fears the economy was slowing down sharply in the second quarter.


The fairly upbeat report from the Commerce Department followed a raft of weak data, including a step-down in hiring in May and tame inflation readings, that have led economists to believe that the Federal Reserve will signal a rate cut later this year when policymakers meet next week.


Financial markets have priced in two rate cuts this year, driven primarily by a recent escalation in the trade war between the United States and China, which economists have warned could undercut economic growth. The economy will next month celebrate 10 years of expansion, the longest in history.


“Don’t count this economy out yet, the consumer is saying, as they show the way by opening their wallets and purses to spend the money that makes the economy hum,” said Chris Rupkey, chief economist at MUFG in New York.


Retail sales rose 0.5 per cent last month as households bought more motor vehicles and a variety of other goods, the government said. Data for April was revised up to show retail sales gaining 0.3 per cent, instead of dropping 0.2 per cent as previously reported.


There were also increases in purchases of building materials and garden equipment, furniture, and electronics and appliances. Americans also spent more on online and mail-order purchases, hobbies, music and books, as well as at bars and restaurants.


But sales at clothing stores were unchanged. Economists polled by Reuters had forecast retail sales increasing 0.6 per cent in May. Compared to May last year, sales advanced 3.2 per cent.


Excluding automobiles, gasoline, building materials and food services, retail sales climbed 0.5 per cent last month after an upwardly revised 0.4 per cent rise in April.


These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.


They were previously reported to have been unchanged in April. Consumer spending accounts for more than two-thirds of economic activity. The outlook for consumption is dimming a bit. Not only did hiring cool in May, wage growth retreated.


Concerns about the labour market have been uppermost in consumers’ minds this month. A second report on Friday showed consumer sentiment ebbed in early June, with households worried the trade fight between Washington and Beijing would hurt the economy, particularly the labour market.


President Donald Trump in early May imposed additional tariffs of up to 25 per cent on $200 billion of Chinese goods, prompting retaliation by Beijing. Trump on Monday threatened more duties on Chinese imports if no deal was reached with Chinese President Xi Jinping at a G20 summit later this month in Japan.


The consumer sentiment survey from the University of Michigan also appeared to suggest consumers rushed to buy big-ticket household items on the tariffs list to beat anticipated price increases as a result of the duties. This suggests retail sales could remain strong in June.


The dollar firmed against a basket of currencies. Prices for longer-dated US Treasuries rose. Stocks on Wall Street were trading lower.


The solid gains in core retail sales in April and May suggested consumer spending was gaining speed in the second quarter after braking sharply in the January-March period.


That together with a third report showing a utilities-led rebound in industrial production last month prompted the Atlanta Fed to raise its second-quarter GDP growth estimate by seven-tenths of a percentage point to a 2.1 per cent annualised rate.


The economy grew at a 3.1 per cent pace in the January-March quarter after getting a temporary boost from exports and an accumulation of inventory. Exports dropped in April and inventories are expected to be a drag on growth. In addition, business investment softened and home sales fell in April. Overall, the economy is losing steam as the stimulus from last year’s $1.5 trillion tax cut and increased government spending dissipates.


May’s 0.4 per cent rise in industrial production was the first increase this year. The report from the Fed also showed manufacturing production rising by a moderate 0.2 per cent last month, leaving output down this year. Production at factories slumped 0.5 per cent in April.


Manufacturing, which accounts for about 12 per cent of the economy, is being constrained by an inventory overhang, especially in the automotive sector, that has left businesses placing fewer orders at factories. Motor vehicle inventories surged 0.8 per cent in April, the Commerce Department said in another report.


The trade tensions between Washington and Beijing are also causing bottlenecks in the supply chain. Those disruptions are undermining domestic industries and overseas manufacturing. — Reuters


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