July Retail Sales Up 0.5%--3rd Straight Rise

Retail sales climbed 0.5% in July, the third consecutive monthly increase, the government said Thursday, but economists say rising interest rates threaten to dampen even this modest growth rate in the months ahead.

The Commerce Department said sales increased $632 million last month to a seasonally adjusted $134.0 billion. The rise followed increases of 0.4% in June and 0.8% in May.

“Retail sales were on the soft side in July,” said Allen Sinai, chief economist of Boston Co. “Where there were increases, they were just moderate. However, coming after so strong a second quarter . . . some pause in growth should not be surprising.”

At the White House, presidential spokesman Marlin Fitzwater called the report “good news” and said the statistics “indicate a steadily growing economy.”

Sinai and other economists said sales should continue to increase through the third quarter because of strong job growth, but they warned that consumer spending will soften eventually as interest rates creep higher.

Many of the nation’s leading banks raised their prime lending rate a half percentage point to 10% on Thursday, just two days after the Federal Reserve boosted its key lending rate.

It was the third increase this year in the prime rate, on which many consumer loan rates are based, and pushed it to its highest level in three years.

‘Squeeze’ on Cash Flow

Bruce Steinberg, an economist with Merrill Lynch, said the growing popularity of adjustable rate home mortgages and home equity loans, most of them fluctuating with the prime rate, means more households are pinched by rising rates than in the past.

“A large group of people are about to experience a squeeze on their cash flow and as we move into the last part of the year that should effect consumer spending,” Steinberg said.

Sales last month were led by a 1.9% jump at automotive dealers to $30.1 billion, the biggest climb since February, when auto sales shot up 2.0%. Automotive sales had climbed a modest 0.4% in June.