Video: Mixed signals on the economy

msnbc.com news services
updated 8/13/2010 4:48:34 PM ET 2010-08-13T20:48:34

Retail sales grew in July for the first time in three months but largely due to a rise in gasoline prices, the government said Friday in a series of reports that added up to a picture of sluggish economic growth.

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Sales rose 0.4 percent last month and sales excluding autos climbed 0.2 percent, the Commerce Department said. Retail strength was concentrated in higher sales of autos and gasoline. Most other retail categories saw their sales fall.

Meanwhile consumer prices rose in July by 0.3 percent – the biggest jump in nearly a year -- as energy costs increased for the first time in five months, the Labor Department said. On an annual basis consumer prices are up a mild 1.2 percent, a bit higher than the 1.1 percent pace last month.

Inventories held by businesses rose for a sixth straight month in June but sales declined for a second month in a row, the government said.

Separately a private survey said consumer sentiment edged up in early August, but consumers expect little economic improvement in the months ahead.

The broad retail sales decline outside of auto and gas sales offered more evidence of a slowing recovery. The concern is that spending will slow further in the second half of this year as households struggle with high unemployment and lackluster job growth.

Economists note that the government revised activity in the previous two months to show slightly smaller decreases. But overall, the declines for most retailers in July suggest the recovery is losing momentum.

"There is only one thing that's for sure — economic momentum has slowed," said Jennifer Lee, senior economist for BMO Capital Markets

The July increase in retail sales followed declines of 0.3 percent in June and 1 percent in May. Sales had surged 2.1 percent in March but since that time consumer spending, which accounts for 70 percent of the economy, has weakened.

The major bright spot was a 1.6 percent rise in sales of motor vehicles and parts. It was the best showing since a 6.6 percent surge in March.

Summer promotions and easier credit lured shoppers back to car buying in July. Nissan, Toyota, Volkswagen, Subaru and Kia reported the biggest gains. The industry sold more than 1 million cars and light trucks. That's 5.1 percent higher than in July 2009. Last year auto sales fell to the lowest level in three decades.

Sales at gasoline stations rose 2.3 percent in July, the biggest jump since last November. But much of that strength reflected higher gas prices.

But in general consumer prices are being held in check by the weak economy. Consumers are spending cautiously and saving more, which makes it harder for companies to raise prices.

Excluding volatile food and energy prices, the so-called "core" inflation index increased by 0.1 percent in July, as the cost of housing, clothes, and used cars and trucks all rose.

Still, core prices are up by only 0.9 percent over a year ago. That's below the Federal Reserve's inflation target and is the slowest pace in 44 years.

July's increase in consumer prices may assuage concerns, raised in recent weeks by some Federal Reserve officials, that the economy is moving toward deflation. Deflation is a widespread and prolonged drop in the price of goods, real estate and stocks. It also reduces wages and can make it harder to pay off debts.

The U.S.'s last serious case of deflation was during the Great Depression.

Most economists don't believe deflation will happen. But they are watching consumer prices closely for any signs of it.

Meanwhile, tame inflation allows the Federal Reserve to keep the key interest rate it controls at a record low of nearly zero percent in an effort to bolster economic growth. The Fed usually fights rising inflation by raising rates.

Excluding auto sales and gas, retail sales would have fallen 0.1 percent in July. That compares with a 0.2 percent increase in June when excluding autos and gasoline.

Sales were down 1 percent at department stores and also dropped at specialty clothing stores, furniture stores, hardware stores and appliance stores.

Business inventories increased 0.3 percent in June, the Commerce Department said, but sales fell 0.6 percent following an even larger 1.2 percent sales decline in May.

The weakness in sales raises concerns about whether companies will continue boosting inventories. Inventory rebuilding had been an important source of strength driving the economic rebound.

Businesses had been rebuilding their inventories in recent months after slashing them aggressively during the recession. But if consumer demand weakens further, businesses could start cutting back. That would mean fewer orders to U.S. factories and weaker output for manufacturers.

The slight pickup in consumer sentiment follows a drop in July to the lowest level since November, the data from Thomson Reuters/University of Michigan's Surveys of Consumers showed.

The survey's preliminary August reading on the overall index on consumer sentiments rose to 69.6 from 67.8 in July, above the median forecast of 69.3 among economists polled by Reuters.

The sentiment index is just several points above where it was a year ago, with worries about prospects for job growth and income hanging over sentiment.

"The gain was too small to represent a meaningful improvement," Richard Curtin, director of the surveys, said in a statement. "Consumers have increasingly come to expect lackluster income and job growth for an extended period of time."

Job growth is considered key to keeping the recovery moving forward, with consumer spending accounting for 70 percent of the U.S. economy. A weaker-than-expected July jobs report from the U.S. government was among recent data fueling worries about a recovery slowdown.

"While consumers increasingly believed the worst of the downturn was over, the majority expected that overall economic conditions would remain largely unchanged during the year ahead," Curtin said.

Retail sales managed a modest increase in July after two consecutive declines, but the strength was concentrated in higher sales of autos and gasoline. Most other retailers saw their sales fall.

Sales rose 0.4 percent last month and sales excluding autos climbed 0.2 percent, the Commerce Department said Friday.

The broad declines outside of auto and gas sales offer more evidence of a slowing recovery. The concern is that spending will slow further in the second half of this year as households struggle with high unemployment and lackluster job growth.

The July increase in retail sales followed declines of 0.3 percent in June and 1 percent in May. Sales had surged 2.1 percent in March but since that time consumer spending, which accounts for 70 percent of the economy, has weakened.

The major bright spot was a 1.6 percent rise in sales of motor vehicles and parts. It was the best showing since a 6.6 percent surge in March.

Summer promotions and easier credit lured shoppers back to car buying in July. Nissan, Toyota, Volkswagen, Subaru and Kia reported the biggest gains. The industry sold more than 1 million cars and light trucks. That's 5.1 percent higher than in July 2009. Last year auto sales fell to the lowest level in three decades.

Sales at gasoline stations rose 2.3 percent in July, the biggest jump since last November. But much of that strength reflected higher gas prices.

Excluding auto sales and gas, retail sales would have fallen 0.1 percent in July. That compares with a 0.2 percent increase in June when excluding autos and gasoline.

The July figures reflected widespread sales declines. Sales were down 1 percent at department stores and also dropped at specialty clothing stores, furniture stores, hardware stores and appliance stores.

The Associated Press and Reuters contributed to this report.

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