U.S. Retail Sales Rise Less Than Forecast, Confidence Firms

By Bob Willis and Shobhana Chandra - Aug 14, 2010 12:19 AM GMT+0400 Fri Aug 13 20:19:11 GMT 2010

The cost of clothing, used cars and tobacco climbed, diminishing the risk of a protracted drop in prices. Photographer: Andrew Harrer/Bloomberg

Aug. 13 (Bloomberg) -- Joe Feldman, managing director at Telsey Advisory Group, talks about the outlook for U.S. retail sales. Feldman also discusses his investment strategy for retailers. He talks with Matt Miller and Carol Massar on Bloomberg Television's "Street Smart." (Source: Bloomberg)

Aug. 13 (Bloomberg) -- Stephen Chick, an analyst at FBR Capital Markets & Co., talks with Bloomberg's Julie Hyman about U.S. consumer spending trends and a recent Gallup poll that finds back-to-school sales have yet to increase this year. (Source: Bloomberg)

Aug. 13 (Bloomberg) -- Michael Darda, chief economist at MKM Partners, talks with Bloomberg's Julie Hyman about the U.S. government's fiscal policies. Darda also discusses the Japanese and U.S. economies, Federal Reserve monetary policy and the U.S. tax code. (Source: Bloomberg)

Aug. 13 (Bloomberg) -- Mohammed El-Erian, chief executive officer and co-chief investment officer at Pacific Investment Management Co., discusses Federal Reserve monetary policy. El-Erian, speaking with Tom Keene and Ken Prewitt on Bloomberg Radio's "Bloomberg Surveillance," also discusses deflation and the outlook for the U.S. economy. (This report is an excerpt of the full interview. Source: Bloomberg)

Partially completed townhouses stand at the Lexington Park development in Des Plaines, Illinois. Photographer: Tim Boyle/Bloomberg

Sales at U.S. retailers rose less than forecast and consumer confidence held near an eight-month low, indicating the economic slowdown will persist into the second half of 2010.

Purchases in July climbed 0.4 percent, led by autos and gasoline, figures from the Commerce Department in Washington showed today. A preliminary sentiment index for August rose to 69.6 from 67.8 the prior month, according to data from Thomson Reuters/University of Michigan.

Consumer spending, which makes up 70 percent of the world’s largest economy, is unlikely to pick up in the absence of a recovery in the labor market. Federal Reserve policy makers this week made their first attempt to shore up a recovery they said was likely to be “more modest” than earlier anticipated.

“The numbers are consistent with a sluggish consumer profile,” said Jonathan Basile, an economist at Credit Suisse in New York. “Things just don’t feel good enough in terms of the level of economic activity and the pace of growth. It reinforces the Fed’s concern.”

Stocks fell for a fourth day after the report. The Standard & Poor’s 500 Index declined 0.4 percent to 1,079.25 at the 4 p.m. close in New York. The S&P Supercomposite Retailing Index dropped 1.4 percent and Treasury securities rose.

Economists forecast retail sales would rise 0.5 percent, according to the median of 77 projections in a Bloomberg News survey. Estimates ranged from a 0.1 percent drop to a 0.9 percent gain. June sales were revised to show a 0.3 percent drop rather than the previously reported 0.5 percent decrease.

Influence on Growth

Excluding autos, gasoline and building materials, which are the figures used in calculating gross domestic product, sales dropped 0.1 percent in July after a 0.3 percent rise the prior month. Economists at Morgan Stanley in New York were among those lowering their estimate for consumer spending this quarter after the report.

J.C. Penney Co., the third-biggest U.S. department-store chain, today lowered its profit forecast for the year, citing an “uncertain” outlook for consumer spending. Kohl’s Corp., the fourth-largest U.S. department-store chain, yesterday lowered its profit forecast for next year.

“We do see a cautious consumer, we see one that’s reluctant to spend,” Kevin Mansell, chairman and chief executive officer at Kohl’s, said in a teleconference.

One reason Americans are hesitating may be because they are concerned about jobs and wages. The share of consumers that believe unemployment will rise over the next year climbed to 32 percent, the highest level this year, the University of Michigan survey showed. Expectations about personal finances dropped to a 17-month low.

Sentiment Forecast

The sentiment gauge was forecast to rise to 69, according to the median of 65 economists in a Bloomberg survey. Estimates ranged from 64 to 74. The index averaged 89 in the five years leading up to the recession that began December 2007, and last month’s reading was the lowest since November.

The cost of living climbed in July for the first time in four months, pointing to a stabilization in prices that may ease concern a slowdown in growth will spur deflation, or a protracted drop that hurts the economy, figures from the Labor Department also showed today.

The consumer-price index increased 0.3 percent, the most in a year and exceeding the 0.2 percent gain projected by the median forecast of economists surveyed. A gauge excluding volatile food and fuel costs, the so-called core rate, increased 0.1 percent, as projected.

Rents Stabilize

The report showed rents, the biggest component in CPI, increased for a second month, and the cost of clothing, used cars and tobacco climbed. Economists say the lack of inflation gives Fed policy makers scope to leave the benchmark interest rate near zero into 2011 to help invigorate the economy.

“There’s been some firming in core inflation in recent months,” said Julia Coronado, a senior U.S. economist at BNP Paribas in New York, who accurately forecast the 0.3 percent gain in the overall prices. “This takes some pressure off the Fed in terms of deflation.”

The Fed said this week in its policy statement that since its June meeting, “the pace of the recovery in output and employment has slowed. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth and tight credit.”

Central bankers retained their commitment to keep the benchmark interest rate close to zero for an “extended period” and said they will reinvest holdings of agency debt and mortgage-backed securities.

More Inventories

Another report today showed inventories climbed in June, led by gains at retailers that indicate companies may need to cut prices to clear out merchandise as demand slows. The 0.3 percent increase in the value of business stockpiles followed a revised 0.2 percent rise in May, the Commerce Department said.

“It doesn’t look like it will be a good back-to-school season, so that will probably lead to incredible bargains” as companies try to trim stockpiles, said Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida.

July is typically the slowest month of the third quarter for retailers as they clear out summer merchandise for the back- to-school season, the second-largest sales period after the year-end holidays.

To contact the reporters on this story: Bob Willis in Washington bwillis@bloomberg.net; Shobhana Chandra in Washington at schandra1@bloomberg.net