Consumer Shopping Spree Gives Retail Sales Big Boost

Not put off by rising prices and increasing pink slips, consumers hit the stores in April, giving retail sales their biggest boost in three months. Wholesale prices rose modestly.

Sales at the nation’s retailers jumped by a surprisingly strong 0.8% after two straight months of declines. Many analysts were predicting a tiny 0.1% rise.

“Let’s hear it for the mall rats,” said economist Joel Naroff of Naroff Economic Advisors. “Apparently, the economy and the labor markets have not faltered enough to scare away households from the malls.”

The good news on retail sales encouraged economists that consumers, a main force keeping the struggling economy afloat, may remain resilient in the months ahead. But it didn’t erase a lingering fear, particularly among the more pessimistic analysts, that rising layoffs might cause consumers to cut back sharply on spending and tip the country into recession.

“Consumers need to remain tough while the economy is weak,” said Mark Zandi, chief economist at Economy.com.

Another government report Friday showed wholesale inflation rose by 0.3% in April as gasoline prices took their biggest leap in 10 months.

Also Friday, the University of Michigan’s consumer sentiment index, which measures consumers’ attitudes about the economy and their current financial picture, rose to 92.6 in May from 88.4 in April, according to market sources. Economists had been expecting a fall to 87.6.

Many economists said the reports won’t deter the Federal Reserve from cutting interest rates for a fifth time this year when it meets Tuesday. But it reopened the debate on the size of the cut: either by another half-point, as many continue to believe, or a more modest quarter-point.

Still, investors worried the batch of data cast doubt over how aggressively the Federal Reserve will continue to cut rates. Bond yields rocketed on the news while stock prices closed moderately lower.

During the last several weeks, there’s been a roller-coaster ride of economic news. On May 4, the government reported that the nation’s unemployment rate shot up to 4.5% in April from 4.3% in March and businesses slashed 223,000 jobs. The weak jobs report stoked recession fears.

Just a week earlier, the government reported the economy grew at an annual rate of 2% in the first quarter, double the growth rate registered in the previous quarter, prompting economists to wonder whether the country had turned a corner.

The 0.8% rise in retail sales in April marked the best showing since a 1.3% leap in January.

Taken together, the strong figures on retail sales and the weak jobs report provide a conflicting view of how the economy is faring in the current second quarter, analysts said.

Even though part of the rise in April’s sales reflected a big 2.5% increase in sales at gasoline stations, reflecting higher prices at the pump, economists said there was no doubting consumers’ appetite for shopping last month.

The Commerce Department’s report showed that sales at general merchandise shops, including department stores, rose 2.1%. Building supplies sales were up 1.5%. Car sales rose 1%, and sales of clothing increased 1.6%.

Economists said discounts, cheap financing, an improvement in the stock market’s performance in April and warmer weather toward the end of the month were factors in making people feel more inclined to spend.

“Consumers have not clamped their wallets shut despite increases in the unemployment rate,” said Lynn Reaser, chief economist at Banc of America Capital Management. “But if layoffs continue to rise rapidly, you’ll see consumers turning more cautious in their spending.”

One of the reasons the Fed has been able to cut interest rates so much this year--by a total of 2 percentage points--is that inflation hasn’t posed a risk to the economy, some analysts argue.

Although the Labor Department’s producer price index, which measures inflation pressures before they reach store shelves, rose in April after having fallen the month before, many economists didn’t view the advance as worrisome.

That’s because many analysts believe increased costs for energy and other items are more likely to squeeze companies’ profits than be passed along to consumers in the form of higher prices--a difficult undertaking when the economy is weak.

The PPI report “bears watching, but it’s not solid evidence that inflation is heating up,” said Bill Cheney, economist at John Hancock.

The rise in April wholesale prices reflected a big 7% jump in gasoline prices, the largest increase since June 2000, when they rocketed upward by 18.1%.

During the last two weeks, the average retail price for gasoline in the United States increased 8.58 cents to $1.76 a gallon, according to the Lundberg Survey of 8,000 service stations nationwide.

Food prices, meanwhile, rose 0.6% in April, down from a whopping 1.1% increase in March.

Excluding volatile energy and food prices, wholesale inflation rose 0.2% in April, compared with a 0.1% gain in March. It was slightly faster than analysts were expecting.

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Reuters was used in compiling this report.

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Producer Prices

Index of finished goods prices; 1982=100; seasonally adjusted:

April: 142.1

Source: Bureau of Labor Statistics