• Aug. 16, 2017, 12:14 pm

Weak retail sales dampen sharp Q2 growth rebound hopes

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. retail sales were flat in April as households cut back on purchases of automobiles and other big-ticket items, the latest sign the economy was struggling to rebound strongly after barely growing in the first quarter.

The weaker-than-expected retail sales report from the Commerce Department, and other data on Wednesday showing the 10th straight month of declining import prices in April, suggest little urgency for the Federal Reserve to start raising interest rates.

“Hopes for a strong rebound are now fading. The likelihood of a near-term Fed action is almost zero now,” said Thomas Costerg, an economist at Standard Chartered Bank in New York.

While March’s retail sales were revised higher to show a 1.1 percent increase instead of the previously reported 0.9 percent rise, that was not enough to offset the general weak tone of the report. Economists had forecast sales up 0.2 percent in April.

Futures markets continued to show that traders do not expect an interest rate hike until December at the earliest.

The dollar fell against a basket of currencies, while prices for U.S. Treasury debt slipped. U.S. stocks were little changed.

Retail sales excluding automobiles, gasoline, building materials and food services were also unchanged after an upwardly revised 0.5 percent increase in March.

These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product. Economists had forecast core retail sales rising 0.5 percent in April after a previously reported 0.4 percent increase in March.

Retail sales have trended weaker despite households getting a massive windfall from lower gasoline prices. Consumers appear to have saved much of the money from the cheaper gasoline.

The retail sales data added to employment and manufacturing reports in suggesting that while the economy was regaining its footing at the start of the second quarter, it lacked enough vigor to convince the Fed to tighten monetary policy soon.

The economy was walloped earlier in the year by a mix of bad weather, disruptions at ports, the strong dollar and deep spending cuts by energy firms.

SILVER LINING?

While the continued weakness challenges the notion that sales had been depressed by the weather and a lack of inventory during a labor dispute at the West Coast ports, economists are optimistic of a pick-up given that personal savings are at two- year highs and consumer confidence remains robust.

“We remain puzzled by the softness in retail sales given the gains in employment, real incomes from lower energy prices, and wealth, but we continue to look for consumer spending to pick up this year,” said John Ryding, chief economist at RDQ Economics in New York.

The weak retail sales trajectory was underscored by Macy’s Inc, one of the largest U.S. department store retailers, which reported a 13.8 percent drop in first-quarter net income, blamed on the weather, the port disruptions and the dollar.

The company, which operates more than 850 stores throughout the United States and U.S. territories, said tourist spending at Macy’s and Bloomingdale’s stores were down sharply. It said second-quarter earnings were expected to fall short of the same period a year ago.

Several other major retailers will report results in the next few days, including Nordstrom, Kohl’s and JC Penney, which will release its earnings after the close of trading Wednesday.

The government reported last month that GDP expanded at a 0.2 percent annual pace in the first quarter.

Trade and wholesale inventory data published last week, however, suggested the economy actually contracted. That was corroborated by a third report from the Commerce Department on Wednesday, showing business inventories barely rose in March.

Economists estimate the economy shrank at a 0.8 percent pace. The government will release its GDP revision later this month.

The case for the Fed to delay hiking interest rates was strengthened by a separate report from the Labor Department showing import prices fell 0.3 percent in April after slipping 0.2 percent in March.

The dollar, which has gained about 11 percent against the currencies of the United States’ main trading partners since June, and lower crude oil prices are keeping a lid on price pressures. That has left inflation running well below the Fed’s 2 percent target.

“The dollar may have stabilized, but until it falls, the downward pressure emanating from lower import costs will limit domestic firm pricing power,” said Joel Naroff, chief economist at Naroff Economic Advisers in Holland, Pennsylvania.

Last month, retail sales were curbed by declines in receipts at auto dealerships, service stations, furniture and electronic and appliance stores.

There were some pockets of strength, with sales of clothing, sporting goods and building materials and garden equipment rising. Receipts at online stores rose as did those at restaurants and bars.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)

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