WRAPUP 3-Modest rise in U.S. retail sales offers cautionary economic note

Mon Jul 15, 2013 1:28pm EDT

* Retail sales rise 0.4 percent in June
    * Sales excluding autos flat, core sales up 0.1 percent
    * Report points to slower pace of consumer spending
    * Business inventories edge up 0.1 percent in May
    * New York state manufacturing expands in July

    By Lucia Mutikani
    WASHINGTON, July 15 (Reuters) - U.S. retail sales rose less
than expected in June, the latest sign of a slowdown in economic
growth that offers a cautionary note to the Federal Reserve as
it mulls scaling back its monetary stimulus.
    A separate report on Monday, however, showed factory
activity in New York state accelerating in July, bolstering the
view of economists that growth was likely to pick up soon.
    Many economists now think U.S. GDP expanded at no more than
a 1 percent annual rate in the second quarter, but employment
growth has been solid and Wall Street still expects the Fed will
soon trim the $85 billion in bonds it is purchasing each month.
    "The disappointing retail sales report underscores the soft
end to the first half," said Millan Mulraine, senior economist
at TD Securities in New York. "However, what will matter for Fed
policy is not the weak performance in the second quarter, but
whether spending reaccelerates or remains stuck in the coming
months."
    Retail sales increased 0.4 percent in June, lifted by demand
for automobiles and higher gasoline prices. However, sales of
building materials fell by the most in a year, a potentially
worrying signal from the housing market.
    Households also spent less on electronics and cut back on
trips to restaurants and bars.
    Retail sales, which account for about 30 percent of consumer
spending, had increased 0.5 percent in May and economists had
forecast a 0.8 percent increase in June. 
    So-called core sales, which strip out automobiles, gasoline
and building materials and correspond most closely with the
consumer spending component of gross domestic product, edged up
0.1 percent after rising 0.2 percent in May.
    It suggested that consumer spending, which accounts for
about 70 percent of U.S. economic activity, probably slowed
sharply from the first quarter's 2.6 percent annual pace.
    Goldman Sachs cut its second-quarter GDP growth estimate by
three tenths of a percentage point to 1.0 percent. Barclays
trimmed its forecast to 0.5 percent from 0.6 percent.
    Stocks on Wall Street were up marginally, drawing support
from better-than-expected earnings from Citigroup. U.S.
Treasury debt price squeezed higher, while the dollar rose
against a basket of currencies.

 
    
    LIGHT AT END OF THE TUNNEL
    The slowdown in economic growth has centered around consumer
spending, trade, inventories and manufacturing. 
    A second report from the Commerce Department showed
businesses were carefully managing their stocks to avoid an
unwanted pile-up of goods in the face of lackluster demand.
    Business inventories rose 0.1 percent in May after a 0.2
percent gain in April, an indication that restocking will be
less of a boost to GDP in the second quarter than it was in the
first, when it added more than half a percentage point to the
growth rate.
    But there are hopeful signs for the factory sector.
    The New York Fed's "Empire State" general business
conditions index rose to 9.46 this month from 7.84 in June. A
reading above zero indicates expansion in the region's factory
activity.
    The survey's measure of new orders rebounded into positive
territory, while two employment gauges also improved.
    Economists are cautiously optimistic the slowdown in
consumer spending will not spill over into the third quarter
given the steady improvement in employment, which is starting to
generate some growth in income.
    "When you look at the forward-looking indicators like the
income pie and consumer confidence, they all augur for a
consumer spending profile that's going to pick up in the second
half of the year," said Jacob Oubina, senior U.S. economist at
RBC Capital Markets in New York.
    Last month, receipts at auto dealerships rose 1.8 percent
after advancing 1.4 percent the prior month. Excluding autos,
sales were flat after rising 0.3 percent the prior month.
    Sales at building materials and garden equipment suppliers
fell 2.2 percent, the weakest reading since May last year. They
had increased 1.2 percent in May and have been boosted by the
housing market recovery. 
    "This could be a result of the recent run-up in mortgage
rates, but we have to wait for more housing data to conclude
that this is actually the case," said Lewis Alexander, chief
economist at Nomura Securities International in New York.