Retail sales, import prices surge

By David Lawder

WASHINGTON (Reuters) - Retail sales in May rose at the strongest pace since January 2006, while import prices surged, adding to recent data suggesting the U.S. economy is recovering strongly from a first-quarter slowdown.

Sales by U.S. retailers rose 1.4 percent, more than twice as much as expected, as consumers shrugged off higher gasoline prices and a housing slump to spend more on cars, clothing, building materials and electronics, a Commerce Department report showed on Wednesday.

Businesses also ramped up inventories at a faster-than-expected 0.4 percent pace in April, the department said in a report that suggested further restocking would boost second-quarter gross domestic product growth.

Import prices, which are monitored closely by Federal Reserve policy-makers as a potential source of inflation, rose in May for the fourth straight month on higher petroleum costs, the Labor Department reported.

"The economy is coming back stronger than anybody could imagine," said Mark Vitner, economist at Wachovia Securities in Charlotte, North Carolina. "We were probably one of the most optimistic groups on the street, and the economy is surpassing even our expectations."

The dollar rallied to a 4-1/2 year high against the yen, while U.S. stocks rose on earnings the strong economic data brightened earnings prospects. Treasury bond prices also rose after sharp declines in recent weeks.

The latest data adds to evidence the U.S. economy is rebounding from a moribund first quarter. U.S. job growth came in at a robust 157,000 in May while exports have been growing, factory activity has picked up and housing is showing signs of stabilization.

The data helped further cement market views that the Federal Reserve is unlikely to cut interest rates this year and may even raise them at some point.

Investors have dumped Treasuries in recent weeks on concerns that central banks worldwide would have to hike rates in response to strong global demand -- a bond sell-off that has pushed down prices and raised yields, contributing to higher U.S. mortgage rates.

But a separate Fed report on Wednesday eased those fears somewhat, helping benchmark 10-year Treasury yields to pull back from five-year highs.

The Fed's Beige Book summary of anecdotal conditions showed that seven of 12 Fed districts reported modest to moderate growth, with others reporting a pickup in growth.

The Fed said overall wage pressures had not increased. But it added there were "significant" price increases for energy-related products and price hikes for some commodities.

U.S. mortgage applications rose last week for the first time in three weeks even as interest rates rose to their highest in nearly a year, the Mortgage Bankers Association said on Wednesday.

BROAD SPENDING SPREE

The increase in retail sales was the biggest since January 2006 and was far stronger than the 0.6 percent increase predicted by Wall Street economists in a Reuters poll.