Retail sales point to firmer consumer spending

WASHINGTON Tue Jan 15, 2013 10:50pm GMT

A woman looks for supplies at a Waldbaums grocery store in Long Beach, New York November 2, 2012. REUTERS/Shannon Stapleton

A woman looks for supplies at a Waldbaums grocery store in Long Beach, New York November 2, 2012.

Credit: Reuters/Shannon Stapleton

WASHINGTON (Reuters) - Retail sales rose solidly in December as Americans shrugged off the threat of higher taxes and bought automobiles and a range of other goods, suggesting momentum in consumer spending as the year ended.

Other data on Tuesday showed inflation pressures remained muted, with wholesale prices declining for a third straight month in December. That should allow the Federal Reserve to stay on its very easy monetary policy path to nurse the recovery.

Retail sales increased 0.5 percent after rising 0.4 percent in November, the Commerce Department said, beating economists' expectations of only a 0.2 percent gain.

Consumers showed resilience even as the economy teetered on the edge of a so-called "fiscal cliff" - $600 billion of automatic government spending cuts and tax increases that were scheduled to start kicking in at the beginning of this year.

"Consumers continue to provide underlying support for the economy," said Eric Green, chief economist at TD Securities in New York.

Sales rose 5.2 percent for the whole of 2012.

So-called core sales, which strip out automobiles, gasoline and building materials and correspond most closely with the consumer spending component of gross domestic product, increased 0.6 percent last month after advancing 0.5 percent in November.

The second straight month of gains in core sales suggested consumer spending picked up in the fourth quarter after rising at an annual pace of 1.6 percent in the July through September period. Consumer spending growth is seen expanding at around a 2.3 percent rate in the last three months of 2012.

While some economists lifted their fourth-quarter gross domestic product forecasts after the sales data, weak exports, a slow pace of inventory accumulation and the reversal of a surge in defense spending will keep growth below 2 percent.

The economy grew at a 3.1 percent rate in the third quarter. A second Commerce Department report showed business inventories rose a modest 0.3 percent in November, backing views restocking would not support growth in the fourth quarter.

Retail shares on Wall Street rose on the data, helping to support the overall stock market. The Morgan Stanley retail index ended up 1.5 percent.

TAXES SEEN SLOWING SALES

While an 11th hour deal by Congress avoided the worst of the "fiscal cliff," households will still see reductions in their paychecks starting in January. That could cause a step back in spending early this year.

"We expect a pullback in consumption spending as consumers adjust to higher payroll taxes and higher taxes for upper income households that eat into disposable income," said Joshua Dennerlein, an economist at Bank of America Merrill Lynch in New York.

Economists estimate that the tax hikes could shave as much as 1.2 percentage points off consumer spending in the first quarter. They see consumer spending in the first three months of the year growing at a meager 0.5 percent rate.

A third report from the Labor Department showed prices received by the nation's farms, factories and refineries fell 0.2 percent in December as energy costs fell. The producer price index had dropped 0.8 percent in November.

Wholesale prices, excluding volatile food and energy costs, edged up 0.1 percent for a second month in a row.

Economists said benign inflation against the backdrop of sluggish growth in the first half of 2013 should cause the Fed to stick with its accommodative monetary policy, despite doubts created by minutes of the December policy meeting released earlier this month.

Those minutes showed some officials expected the central bank would have to end its bond buying well before the end of this year.

"Inflation is a worry for another day. The tame inflation data and expectations of weak GDP data suggests that the Fed is going to continue to purchase assets through most of this year and probably extend it to early 2014," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania.

Boston Fed President Eric Rosengren told Reuters on Tuesday the U.S. central bank could continue buying bonds into early next year if the labor market improves only gradually.

Retail sales last month were up almost across the board, with receipts at auto dealerships rising 1.6 percent after increasing 2.7 percent in November. Sales at service stations fell, reflecting a 14 cent drop in gasoline prices at the pump.

There were gains in furniture sales, and sales at clothing retailers rose the most since February. While the consumption side of the economy is holding up fairly well, production appears to be faltering.

A third report showed factory activity in New York State fell for a sixth straight month in January, weighed down by weak orders and shipments.

(Additional reporting by Jason Lange in Washington, editing by Andrea Ricci and Dan Grebler)

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