updated 8/13/2007 10:33:04 AM ET 2007-08-13T14:33:04

Consumers went shopping for clothes, furniture and electronics products last month, helping give a modest boost to retail sales despite continued weakness in the demand for new cars.

Major Market Indices

The Commerce Department reported Monday that retail sales edged up 0.3 percent in July after having plunged by 0.7 percent in June, the worst showing in 16 months.

Consumer spending, which accounts for two-thirds of total economic activity, is being watched carefully now. The fear is that the recent turmoil in financial markets combined with slumping home prices will make Americans more hesitant to spend in the months ahead, raising the threat of a possible recession.

Wall Street suffered through some stomach-churning days last week because of worries about how credit problems that began in the market for subprime mortgages might spread to other types of loans. The Federal Reserve and other central banks around the world sought to calm investor fears by injecting billions of dollars into the banking system in an effort to keep short-term interest rates from rising.

In a second report, the Commerce Department said that businesses built up their stockpiles by 0.4 percent in June, slightly below a 0.5 percent increase in May.

The June increase was right in line with expectations. Economists are looking for inventory building to help bolster economic growth in coming months.

The 0.3 percent rise in overall retail sales last month was slightly better than the 0.2 percent gain that had been expected. It was driven by increased demand for electronics gear and appliances, furniture and clothing. These increases helped to offset a 0.3 percent slump in sales at auto dealerships which followed an even bigger 2.9 percent drop in June.

Consumers have been the standout performers during the current economic expansion but there are indications that their spending spree could be slowing in the face of a spike in gasoline prices in the spring and a two-year slump in housing which has sent home prices down in many formerly red-hot markets, making homeowners feel less wealthy and less inclined to spend on other items.

For the April-June quarter, consumer spending rose at an annual rate of just 1.3 percent, the weakest showing since late 2005 when the country was being battered by the impact of the Gulf Coast hurricanes.

Even with the slowdown in consumer demand, the overall economy rebounded to an annual rate of 3.4 percent in the second quarter following growth at a barely discernible 0.6 percent in the first three months of this year.

Analysts are looking for economic growth to come it at a pace of around 2.5 percent in the second half of this year.

The 0.3 percent rise in retail sales would have been a slightly higher 0.4 percent increase if it had not been for a big 0.8 percent fall in sales at service stations, reflecting a drop in gasoline prices after a spike this spring.

The 0.3 percent rise in retail sales was a bit of a surprise given reports last week from the nation’s big retail chains reported generally disappointing results in July.

Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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