Retail sales jump and signal pick-up in growth

A customer shops in the expanded baby department at a remodelled Sam's Club in Rogers, Arkansas June 3, 2010.

WASHINGTON (Reuters) - Sales at U.S. retailers posted their strongest gain in seven months during October, adding to signs the economy was regaining strength after hitting a soft patch in the summer.

The Commerce Department said on Monday total retail sales rose a surprisingly strong 1.2 percent, nearly double market expectations, as consumers snapped up motor vehicles and building materials.

The generally upbeat report was tempered somewhat by news that a manufacturing gauge in New York state fell this month to its lowest level since April 2009.

Still, the fourth monthly rise in sales data was widely seen as the latest in a series that suggest a pick-up in economic activity.

"We are starting to see some movement from temporary stimulative factors that were supporting growth to more permanent sources of growth," said Troy Davig, a senior U.S. economist at Barclays Capital in New York.

Recovery from the worst recession since the 1930s braked in the summer as the boost from a $814-billion government stimulus package faded and a sovereign debt crisis blew up in Europe.

Retail sales grew 0.7 percent in September and markets had expected them to rise an equal 0.7 percent last month.

Although the New York Federal Reserve's "Empire State" general business conditions index unexpectedly fell to -11.1 in November from 15.7 in October, economists were little worried.

They noted that the survey was very volatile and not a bellwether for the rest of the domestic manufacturing sector.

Economists had expected the index to tick down to 14 this month. The survey's forward-looking index of business conditions six months ahead was more upbeat, rising to 54.6 from 40 in October.

The sturdy retail sales report, along with news of a couple of takeover bids, helped U.S. stocks to rise early before slipping to end marginally lower on Monday.

Yields on U.S. Treasury debt rose on further signs the U.S. economic recovery was on track, while Ireland's fiscal problems pressured the euro and helped lift the U.S. dollar to a six-week high against major currencies.

MONETARY EASING

A loss of momentum in the U.S. economic recovery during the summer prompted the Federal Reserve this month to controversially ease monetary policy further by announcing it would buy $600 billion worth of government bonds through the middle of next year.

Even though data so far for October suggest some strength in the economy, the pace of the recovery remains too tepid to bring down a 9.6 percent unemployment. Analysts believe this means the Fed will not change course.

"The economy is still growing too slowly to make a dent in the unemployment rate. But it is enough to keep the expansion alive despite an impending slowdown in inventory investment," said Chris Low, chief economist at FTN Financial in New York.

A second report from the Commerce Department showed business inventories rose 0.9 percent to $1.40 trillion, the highest level since March 2009, after increasing by a revised 0.9 percent in August.

Economists had expected inventories to rise 0.8 percent from a previously reported 0.6 percent increase in August.

September's larger-than-expected increase in inventories and August's upward revision suggest the government will raise its preliminary GDP growth estimate when it publishes its first revision this month.

Initial estimates put third-quarter GDP at a 2.0 percent annual rate. A 5.0 percent surge in motor vehicle and parts purchases buoyed retail sales last month. Excluding autos, sales rose 0.4 percent last month after a 0.5 percent increase in September.

Building materials and garden equipment sales rose 1.9 percent last month, the largest gain since April, after increasing 1.3 percent in September.

But core retail sales -- which correspond most closely with the consumer spending component of the government's GDP report -- rose 0.2 percent after a 0.4 percent increase in September. They exclude autos, gasoline and building material sales.

There were gains across most sales categories. Receipts at gasoline stations, clothing and clothing accessories stores increased last month. Sales at sporting goods, hobby and book stores saw their largest increase since March.

Retail giant Wal-Mart Stores Inc (WMT.N) is expected to report on Tuesday that sales at existing U.S. stores fell only a little bit in the third quarter.

"Although still cautious and in search of value, the American consumer has returned," said Retail Industry Leaders Association President Sandy Kennedy. "Retailers are happy to turn the page on the last three years and embrace a more optimistic future."

However, sales at electronics and appliance, and furniture stores fell last month.

(Additional reporting by Rodrigo Campos in New York; Editing by Andrew Hay)