Retail sales drop, inflation muted

WASHINGTON (Reuters) - Retail sales tumbled in April as high gasoline prices pinched spending elsewhere, but signs that inflation remained in check aside from energy costs offered reassurance the economy was slowing in an orderly way.

A Commerce Department report on Friday showed sales by U.S. retailers fell 0.2 percent to a seasonally adjusted $372.03 billion last month, hurt by a one-two punch of soaring gasoline prices and a slumping housing market.

But separately, the Labor Department said that while costlier energy pushed producer prices up 0.7 percent in April, the so-called core rate that strips out food and energy costs was unchanged from March.

"Bottom line, today's data reinforces the view that inflation is contained while the economy is showing signs of a slowdown," said Alex Beuzelin, an analyst with Ruesch International in Washington.

"It also supports the view that the Fed (Federal Reserve) will have to cut rates sometime this year," he added.

The U.S. central bank's policy-setting committee met this week and decided to keep rates steady for now, citing a potential for inflation to rise. That view was not backed up by Friday's data on producer prices, which essentially measures prices at the factory door and at the farm gate.

RATE CUT SPECULATION

U.S. government bonds initially rose after the soft data on retail sales and underlying producer price inflation boosted hopes that the Fed could cut rates earlier than expected. However, they turned negative in early afternoon trading.

Stock prices rebounded from a sharp drop on Thursday as investors bet the chances for an official interest-rate cut later in the year were bolstered.

Former U.S. Fed Chairman Alan Greenspan, in an address by satellite link to a Singapore audience, said on Friday he considered there was a one-in-three chance the U.S. economy could slip into recession this year. That was a repeat of a comment he made in March that rattled markets at the time.

Another report from the Commerce Department, on March business inventories, showed the inventory-to-sales ratio that gauges how long it would take to sell off stocks at the current sales pace dropped to 1.27 months' worth from 1.29 in February.

The inventories report is a lagging one, but it implied room for companies to keep expanding output.

The retail sales report showed widespread declines in April sales, for everything from clothing to sporting goods and spending at restaurants. Spending on building materials took its sharpest tumble in more than four years and new-car sales fell by the largest amount since mid-2006.

WARY CONSUMERS

"Once again you are seeing that housing and higher gasoline prices appear to be weighing on the consumer," said Kevin Flanagan, a fixed-income strategist for global wealth management with Morgan Stanley, Purchase in New York.

Excluding automobiles that account for 20 percent of total retail business, sales were flat in April but that was following a 1.1 percent March increase.

The sales figures came in much weaker than Wall Street economists had forecast and will reinforce worry that consumers will have difficulty sustaining their spending punch that fuels two-thirds of national economic activity.

Total retail sales had been forecast to rise 0.4 percent, instead of decline, and sales excluding automobiles also had been predicted to gain 0.4 percent rather than being flat.

Still, the weak retail sales number did not come as a total surprise, since major retailers on Thursday had reported their April sales were below forecasts and blamed it on cold, stormy weather in much of the country and on an earlier Easter holiday that reduced demand for spring items.

The producer prices report showed April prices were up 3.2 percent from the same month a year earlier while core producer prices gained 1.5 percent from April 2006.

(additional reporting by Mark Felsenthal and Nancy Waitz)