U.S. economy starts long recovery as retail sales post record jump

WASHINGTON (Reuters) - U.S. retail sales increased by the most on record in May after two straight months of sharp declines as businesses reopened, offering more evidence that the recession triggered by the COVID-19 pandemic was over or drawing to an end.

The report from the Commerce Department on Tuesday followed news early this month that the economy created 2.5 million jobs in May. Layoffs are also ebbing and manufacturing activity is improving, though production remains at very low levels.

The surge in retail sales last month recouped 63% of March and April’s decreases. But the journey to recovery could be long and difficult as some parts of the country are experiencing a resurgence of COVID-19 infections. In addition, enhanced federal government unemployment checks will run out in July.

Federal Reserve Chair Jerome Powell told U.S. lawmakers on Tuesday that “until the public is confident that the disease is contained, a full recovery is unlikely.”

Retail sales jumped 17.7% last month, the biggest advance since the government started tracking the series in 1992. Sales dropped a record 14.7% in April. Economists polled by Reuters had forecast retail sales would rise 8% in May.

Retail sales fell 6.1% on a year-on-year basis in May. Even with May’s surge, sales were still about 8% below their February level, leaving consumer spending and the economy on track for their biggest contraction in the second quarter since the Great Depression. The economy slipped into recession in February.

“The economy and retail sales have hit the bottom in May and we have a V-shaped first stage of recovery,” said Sung Won Sohn, a business economics professor at Loyola Marymount University in Los Angeles. “However, it will take quite some time to get back to anywhere near the levels of retail sales and economic activity we enjoyed around the turn of the year.”

The reopening last month of nonessential businesses that were shuttered in mid-March to slow the spread of COVID-19 has seen Americans flocking to car dealerships and spending more on gasoline, apparel and at restaurants.

Though nearly 20 million people have lost their jobs to the pandemic, record savings and the government’s historic fiscal package of nearly $3 trillion are providing a cushion for consumers through one-time $1,200 checks and generous unemployment benefits. The unprecedented economic upheaval saw personal savings increasing at a record $337 billion in April and the saving rate hitting an all-time high of 33%.

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The recovery in retail sales last month was led by a 44.1% acceleration in sales at auto dealerships.

Receipts at service stations increased 12.8%. Sales at electronics and appliance stores soared 50.5%. Receipts at clothing stores rebounded 188% last month. Still, clothing store sales remained about 63% below their February level.

Sales at furniture stores soared 89.7%. Receipts at restaurants and bars advanced 29.1%. Spending at hobby, musical instrument and book stores vaulted 88.2%. All these categories had suffered record declines in sales in March and April.

Online and mail-order retail sales rose 9.0%. Sales at building material stores rose 10.9%.

The surge in demand for motor vehicles helped to lift manufacturing production 3.8% in May, a separate report from the Fed showed on Tuesday, after collapsing by a record 15.5% in April. Manufacturing, which accounts for 11% of the U.S. economy, remains hobbled by supply-chain disruptions.

Cheaper crude oil has made oil and gas wells unprofitable, impacting demand for heavy equipment and machinery.

“We expect a gradual recovery over the next few years, with growth lagging that of the overall economy,” said Gus Faucher, chief economist at PNC Financial in Pittsburgh. “One potential upside risk is if firms decide to shorten their supply chains because of the pandemic and the associated disruptions to global trade, moving manufacturing capacity back to the U.S.”

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Stocks on Wall Street rallied on the reports and data showing reduced COVID-19 death rates in a trial of a generic steroid drug. The dollar .DXY rose against a basket of currencies. Prices of U.S. Treasuries fell.

Excluding automobiles, gasoline, building materials and food services, retail sales surged 11% in May after tumbling 12.4% in April. These so-called core retail sales correspond most closely with the consumer spending component of the gross domestic product report.

Economists expect consumer spending, which accounts for more than two-thirds of U.S. economic activity, could decline at as much as a 37% annualized rate in the second quarter. That could result in GDP falling at around a 36% pace in that period.

Consumer spending contracted at a 6.8% rate in the first quarter, the sharpest drop since the second quarter of 1980. The economy shrank at a 5% pace in the January-March quarter, the deepest contraction since the 2007-2009 Great Recession.

Weak GDP this quarter was underscored by other data on Tuesday showing a tumble in business inventories in April.

Reporting by Lucia Mutikani; Additional reporting by Dan Burns; Editing by Paul Simao