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Increase in US retail sales eases fears over economy

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WASHINGTON: US retail sales increased more than expected in June, pointing to strong consumer spending, which could help to blunt some of the drag on the economy from weak business investment.


The report from the Commerce Department on Tuesday did not change market expectations that the Federal Reserve will cut interest rates this month for the first time in a decade.


But coming on the heels of solid employment growth in June and a pickup in underlying inflation, the signs of strong consumer spending further reduced the possibility of the US central bank cutting rates by 50 basis points at its July 30-31 policy meeting as markets had initially anticipated.


Fed Chairman Jerome Powell last week told lawmakers the central bank would “act as appropriate” to protect the economy against risks stoked by a trade war between the United States and China, as well as slowing global growth.


“It certainly will counteract weak business spending to some degree,” said Robert Frick, corporate economist at Navy Federal Credit Union in Vienna, Virginia. “Given that the Fed is most worried about foreign economies and the threat of an escalating trade war, it is unlikely to dissuade them from cutting rates soon.”


Retail sales increased 0.4 per cent last month as households stepped up purchases of motor vehicles and a variety of other goods, including furniture and building materials. Data for May was revised slightly down to show retail sales gaining 0.4 per cent, instead of rising 0.5 per cent as previously reported.


Economists polled by Reuters had forecast retail sales edging up 0.1 per cent in June. Compared to June last year, retail sales advanced 3.4 per cent.


Excluding automobiles, gasoline, building materials and food services, retail sales jumped 0.7 per cent last month after an upwardly revised 0.6 per cent increase in May. These so-called core retail sales, which correspond most closely with the consumer spending component of gross domestic product, were previously reported to have increased 0.4 per cent in May.


June’s strong gain in core retail sales followed solid increases in April and May, suggesting consumer spending accelerated in the second quarter after rising at its slowest pace in a year in the January-March period.


The upbeat retail sales data buoyed the dollar against a basket of currencies, while US Treasury prices fell. Stocks on Wall Street were trading mostly lower as quarterly earnings from three big banks, including Goldman Sachs, drew mixed reactions from investors.


BROAD GAINS


Consumer spending is being supported by a tight labour market, even as the broader economy is slowing as weaker business investment, an inventory overhang, a trade war between the United States and China, and softening global growth pressure manufacturing. The Fed reported on Tuesday that manufacturing output rose 0.4 per cent in June, boosted by increased production of motor vehicles and parts, after gaining 0.2 per cent in May. Still, factory production dropped at an annual rate of 2.2 per cent in the second quarter, the biggest decrease in three years, after contracting at a 1.9 per cent pace in the January-March period.


With consumer spending and job growth regaining momentum, some economists argued that the Fed should not cut rates at the end of this month.


“While growth may be moderating it is not faltering,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. “That is a big difference that should not be difficult to comprehend, but I guess the Fed chair and his band of economic gurus don’t seem to get the point.”


Following the retail sales and industrial production data, the Atlanta Fed lifted its GDP growth estimate for the second quarter by two-tenths of a percentage point to a 1.6 per cent annualised rate. The economy grew at a 3.1 per cent pace in the January-March quarter.


The government will publish its snapshot of second-quarter GDP next Friday. The economy is losing speed in part as last year’s stimulus from massive tax cuts and more government spending fades.


Auto sales increased 0.7 per cent in June after a similar gain in May. Receipts at service stations fell 2.8 per cent, reflecting cheaper gasoline. Sales at building material stores rebounded 0.5 per cent after dropping 1.5 per cent in May. Receipts at clothing stores rose 0.5 per cent. — Reuters


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