By Canadian Press

Tepid retail sales lower expectations for US economic growth

Aug 12, 2016 | 9:39 AM

WASHINGTON — A sluggish month of retail spending has tempered expectations for the U.S. economy’s growth in the coming months.

Consumers pulled back on shopping and eating out in July after three straight solid monthly gains, the government said Friday. Those declines were offset by increases in auto sales and online and catalogue sales.

Many economists credited the surge in online and catalogue spending, which rose 1.3 per cent, mainly to deals offered during Amazon’s “Prime Day” on July 12. Amazon said its sales rose 60 per cent on Prime Day compared with a year earlier.

Still, the flat reading for overall retail sales suggested that the economy might not rebound as quickly from a slump that struck early this year as economists had been expecting. And a separate report Friday that U.S. producer prices last month registered their sharpest drop since September was a reminder that inflation remains lower than the Federal Reserve wants it to be.

Combined, Friday’s economic reports make it even less likely that the Fed will raise interest rates before December. Few analysts expect any changes at the Fed’s next meeting in September, and some foresee no rate hike before 2017.

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July’s retail sales figures “won’t inspire much confidence in the economic momentum at this point,” Michael Dolega, senior economist at TD Bank, said in a research note. “The poor showing makes any likelihood of a rate hike this year all the more distant.”

Last month’s flat reading for retail spending followed increases of 0.8 per cent in June, 0.2 per cent in May and a robust 1.2 per cent increase in April. Some economists suggested that it could mark merely a temporary dip after the solid readings through the spring.

“Given that employment has rebounded, consumer confidence is holding up, I’m not overly concerned,” said Paul Ashworth, chief U.S. economist at Capital Economics.

The retail sales figure is measured in dollars, which means that falling prices can reduce the figure even if consumer demand remains solid. Excluding gasoline, retail sales rose 0.2 per cent last month.

Steady hiring and some evidence of rising pay have been boosting Americans’ confidence and encouraging spending, which jumped 4.2 per cent in the April-June quarter, the most in 18 months.

Indeed, consumers’ willingness to spend has provided one of the few sources of growth this year. The economy expanded at a tepid annual pace of just 1 per cent in the first six months of 2016 despite consumer’s healthy showing in the second quarter.

Still, other sources of growth are likely to emerge in the third quarter, Ashworth said, even as consumers pull back. Businesses are likely to rebuild their stockpiles, after cutting them in the second quarter. That should also add to growth, which he projects will be nearly 3 per cent in the July-September quarter.

Employers are hiring at a robust pace, having added 255,000 jobs in July and 292,000 in June — the most in eight months. That’s kept the unemployment rate at a low 4.9 per cent, even as more Americans have started looking for work.

Strong job gains and low unemployment are starting to pressure employers to raise pay. Higher wages would likely fuel more spending in coming months. Many economists forecast that annualized economic growth will rebound to a 3 per cent pace in the current July-September quarter.

Friday’s report on producer prices showed that those figures, which reflect the cost of goods and services before they reach consumers, fell 0.4 per cent in July.

Falling gas prices contributed to the decline. Gas prices are forecast to stay low through the summer, at an average of $2.19 a gallon, according to a report from the U.S. Energy Information Administration. Prices that low would restrain inflation and make it harder for the Fed to achieve its goal of a 2 per cent annual increase in prices.

Even excluding the volatile energy and food categories, “core” producer prices dropped 0.3 per cent in July, the most since February 2015.

Christopher S. Rugaber, The Associated Press