Solid sales ease recession jitters

By Emily Kaiser

WASHINGTON (Reuters) - U.S. retail sales rose solidly in September while inflation pressures were largely muted, according to data on Friday that eased recession fears and suggested further interest rates cuts may not be needed.

The show of consumer spending power in the face of a slumping housing market and tighter credit conditions gave a lift to stocks prices and to the value of the dollar.

Bond prices fell as traders saw the data reducing chances that the Federal Reserve, which lowered borrowing costs in September, would do so again at a meeting at end of the month.

"People were expecting that perhaps the economy was on the brink of recession, but you can't have a recession if consumers are continuing to spend, and by all means, they seem to be continuing to spend," said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.

When the U.S. central bank lowered rates by a surprisingly large half-percentage point on September 18, economic reports looked dour, with surprisingly weak August jobs data triggering recession fears. But the latest reports paint a less gloomy picture of an economy that is slowing but not stalling.

After the Fed moved to combat economic weakness, inflation worries also began to stir. But a report from the Labor Department showed core inflation at the producer level rose a slight 0.1 percent last month, less than economists had forecast. Including volatile food and energy costs, producer prices advanced by a larger-than-expected 1.1 percent.

"CONSUMER IS GOING TO BE OK"

Retail sales rose a bigger-than-expected 0.6 percent as sales at gasoline stations grew the most since May, a Commerce Department report showed, while car sales also were brisk.

Even excluding cars and gasoline, retail sales were up 0.2 percent.

However, there were some concerns that sales in October may look less rosy. Consumer sentiment in the Reuters/University of Michigan Surveys of Consumers dipped to 82.0 in early October, the lowest reading since August 2006 and slightly below analysts' expectations.

The data came one day after major U.S. retail chains reported disappointing September sales, which they blamed on unusually warm weather that curbed demand for fall clothing.

"The retail numbers are where the action is. With all the concerns about the consumer, and the fact a number of retailers suggested weaker sales this week, this is a big number," said Jim Paulsen, chief investment officer at Wells Capital Management in Minneapolis.

"This builds the case that there is not a lot of fallout from the (housing and credit) crisis on consumer spending," Paulsen said. "We are really starting to build a case here: jobs are OK, consumer OK and if the consumer is going to be OK, the economy's going to be OK."

Corporate America also seemed to be on solid footing, with General Electric Co (GE.N) reporting a 14 percent rise in quarterly profit and McDonald's Corp (MCD.N) forecasting earnings above Wall Street's expectations.

With last week's employment report showing solid job gains in both September and August, the Fed may be content to leave interest rates unchanged on October 31.