WASHINGTON Cash from government stimulus checks helped push U.S. retail sales up at twice the rate expected in May but the strength could be fleeting as households contend with soaring prices and the worst housing slump in decades.
The full percentage point gain in retail sales in May reported by the Commerce Department on Thursday surprised financial markets and bolstered bets the Federal Reserve would begin to bump up interest rates within a few months to tamp down inflation.
Higher gasoline prices gave a lift to service station sales last month, but even with those stripped out, sales rose 0.8 percent, the biggest gain in a year. Consumers snapped up a range of items from clothing to sporting goods to electronics.
Sales at general merchandise stores, which include discounters like Wal-Mart and Target, saw the largest increase in 14 months.
Economists, however, did not view the data as suggesting a fundamental shift in an otherwise weak spending trend.
"Apparently, a lot of households were simply not in a position to save the rebates amid soaring costs of living, notably higher energy prices. Others enjoyed the temporary increase in their spending scope and bought electronics or clothes," said Harm Bandholz, economist at Unicredit Markets and Investment Banking in New York.
The U.S. Treasury sent out about $48 billion in tax rebates to American consumers during May as part of a plan to spur the economy, eclipsing the $3.9 billion increase in sales.
Economists generally agreed the stimulus payments had lifted sales, although they said it was impossible to know how big an impact they had. Some analysts also said upward revisions to sales data for the prior two months suggested the U.S. consumer and the economy have been faring better than expected.
U.S. stock prices rose on the strong spending data, with the blue chip Dow Jones industrial average up about 110 points, or nearly 1 percent, in early afternoon.
However, prices for U.S. government debt tumbled on both the data and a fresh warning on inflation from a Fed official as traders braced for a series of rate hikes. Futures markets showed dealers saw a good chance the central bank could begin to raise benchmark overnight rates as early as September.
"Inflation is on everybody's mind. ... We have to take appropriate steps to do something about that," Philadelphia Federal Reserve Bank President Charles Plosser said on CNBC.
JOBLESS CLAIMS, IMPORT PRICES RISE
Even with the last month's sharp rise in consumer spending, which fuels roughly 70 percent of total economic output, conditions in the labor market have been deteriorating.
The government said earlier this month that the economy shed jobs for a fifth straight month in May as the unemployment rate shot up to 5.5 percent from 5 percent in April.
A Labor Department report on Thursday showed more workers than expected signed up for unemployment aid last week, suggesting the job market was still weakening. Economists expect little improvement soon, particularly with a wave of planned auto plant shutdowns.
New applications for state jobless benefits jumped to 384,000 last week from 359,000 in the prior week, while the total number of unemployed on the benefit rolls in the week ended May 31 rose to 3.14 million, a four-year high.
While the weak labor market has kept pressure for higher wages under wraps, the rising cost of oil and food has put stress on household and business and raised alarm bells at the U.S. central bank.
The Labor Department said on Thursday that U.S. import prices shot up 2.3 percent in May, capping the biggest three-month increase in more than 17 years, as the cost of imported petroleum surged 7.8 percent. Excluding petroleum, import prices moved up only 0.5 percent.
A separate report from the Commerce Department showed business inventories rose 0.5 percent in April, more than expected, while sales were their strongest since November.
In anticipation of a pickup in spending by consumers with rebate checks in hand, retailers increased their stocks by 0.4 percent in April.
Even with the latest increase, business inventories still remain lean. The stock-to-sales ratio, which measures how long it would take to empty inventories at the current pace, fell to 1.25 months in April, the lowest in five months.
(Additional reporting by Mark Felsenthal and Doug Palmer; Editing by Neil Stempleman)