updated 6/12/2008 12:48:30 PM ET 2008-06-12T16:48:30

Retail sales jumped by the largest amount in six months in May as 57 million economic stimulus payments helped offset the headwinds buffeting consumers.

Major Market Indices

The Commerce Department reported Thursday that retail sales soared 1 percent last month, the biggest increase since November. A wide variety of retailers enjoyed a good month, including the biggest increase at department stores and other general merchandise stores in a year.

The May increase was double what economists had been expecting and indicated that the economy is getting a major boost from the $50 billion in economic stimulus payments the government sent out in May, just under half of the total stimulus aimed at consumers.

The Bush administration is hoping the stimulus payments will help offset the gloom from a prolonged slump in housing, a severe credit crisis, soaring energy bills and rising layoff notices and help the country avert a deep recession.

Highlighting the pressures on the job market, the Labor Department reported Thursday that new applications for jobless benefits rose by 25,000 last week to 384,000, the highest level since late March.

It was a much bigger increase than analysts had been expecting. Last week, the government reported that the unemployment rate jumped to 5.5 percent in May, up from 5 percent in April. That was the biggest one-month rise in 22 years.

In a third report, the Commerce Department said that business inventories grew by 0.5 percent in April, more than double the 0.2 percent rise in March and the best showing since inventories rose by 1 percent in January.

Analysts were surprised by the solid increase in retail sales and noted that sales in April were also revised to show a respectable gain of 0.4 percent, instead of the original estimate that sales had fallen by 0.2 percent.

"Recession? What recession?" asked Joel Naroff, chief economist at Naroff Economic Advisors. "Spending in April and May was solid in just about every category."

Ian Shepherdson, chief U.S. economist at High Frequency Economics, said one possible explanation was that consumers have suddenly returned to their carefree spending ways despite weak consumer confidence readings and the credit crunch.

But he said a more likely reason was that rebate checks were giving a temporary boost to spending that would not last, resulting in weaker economic performance in coming months.

The retail sales report showed that general merchandise stores, which include department stores and discount stores such as Wal-Mart, saw sales rise by 1.2 percent, the best showing since a 2.1 percent rise in March 2007.

Auto dealers saw sales increase by a much smaller 0.3 percent in May, but that still represented a small rebound after a big 2.1 percent drop in April. Auto sales are being hurt by the weak economy and soaring gasoline prices, which have sharply depressed demand for gas-guzzling pickup trucks and sport utility vehicles.

Gasoline service stations reported sales up 2.6 percent, an increase that largely reflected soaring prices, which have pushed gasoline to above $4 per gallon nationwide. Energy Department analysts are forecasting that pump prices will keep rising, probably peaking at around $4.15 per gallon in August.

Excluding the big rise in gasoline costs, retail sales would still have been up by a solid 0.8 percent in May.

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