Motor vehicles, building materials lift US retail sales in May

WASHINGTON, June 15 (Reuters) – U.S. retail sales unexpectedly rose in May as consumers stepped up purchases of motor vehicles and building materials, which could help to stave off a dreaded recession in the near term.

While other data on Thursday showed first-time applications for state unemployment benefits holding steady last week at more than a 1-1/2 year high, economists did not view this as a sign of a material shift in the labor market, which remains tight.

Minnesota recently changed policy to make non-instructional educational staff eligible for unemployment benefits during the summer break, boosting claims in the state. Most economists have been forecasting a recession since late 2022.

The economy has remained defiant despite 500 basis points worth of interest rate increases from the Federal Reserve since March 2022, when the U.S. central bank embarked on its fastest monetary policy tightening cycle since the 1980s.

The Fed on Wednesday left its policy rate unchanged, but signaled in new projections that borrowing costs may still need to rise by as much as half of a percentage point by year end.

“The U.S. economy is holding up relatively well through the second quarter despite some softness,” said Robert Kavcic, a senior economist at BMO Capital Markets in Toronto.

Retail sales increased 0.3% last month after rising 0.4% in April, the Commerce Department said. Economists polled by Reuters had forecast sales would slip 0.1%. Sales increased 1.6% year-on-year in May.

Retail sales are mostly goods and are not adjusted for inflation. Food services and drinking places are the only services category in the retail sales report.

Though inflation and higher borrowing costs are causing consumers to be more selective and sensitive to prices, spending has remained resilient thanks to strong wage gains resulting from a tight labor market. Subsiding inflation is starting to lift consumers’ purchasing power, though only marginally.

Some households still have savings accumulated during the COVID-19 pandemic.

Sales at auto dealers increased 1.4%. Sales at building material and garden equipment supplies dealers jumped 2.2%, likely driven by home renovations.

Furniture store sales rebounded 0.4% while receipts at electronics and appliance stores climbed 0.2%.

Online retail sales gained 0.3%. Sales at food services and drinking places rose 0.4%. Economists view dining out as a key indicator of household finances. Spending on hobbies rose 0.3%. Sales at service stations fell 2.6%, reflecting lower gasoline prices.

The persistent strength in spending could keep inflation elevated, compelling the Fed to raise rates next month, some economist said.

“Higher interest rates haven’t tamped down consumer demand enough to meaningfully slow price growth, especially on the services side of the economy,” said Ben Ayers, senior economist at Nationwide in Columbus, Ohio. “These hot trends for consumers could led to another interest rate hike by the Fed in July.”

Inflation, however, continues to show signs of ebbing. Import prices fell in May and the annual decrease in prices was the sharpest in three years, a separate report from the Labor Department showed on Thursday.

Stocks on Wall Street were trading higher. The dollar fell against a basket of currencies. U.S. Treasury prices rose.

SLOWER MOMENTUM

Excluding automobiles, gasoline, building materials and food services, retail sales gained 0.2% last month. Data for April was revised slightly lower to show these so-called core retail sales rising 0.6% instead of the previously reported 0.7%.

Core retail sales correspond most closely with the consumer spending component of gross domestic product. With price pressures subsiding in May, economists estimated that core retail sales increased 0.2% after adjusting for inflation.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, grew at its fastest pace in nearly two years in the first quarter, offsetting the drag on GDP growth from a sharp inventory slowdown. The economy grew at a 1.3% annualized rate last quarter. The Atlanta Fed is currently estimating GDP will rise at a 1.8% pace in the second quarter.

A third report from the Labor Department on Thursday showed initial claims for state unemployment benefits were unchanged at a seasonally adjusted 262,0000 for the week ended June 10, remaining at levels last seen in October 2021. Economists had forecast 249,000 claims for the latest week.

Unadjusted claims increased 28,763 to 249,212 last week. Claims in Minnesota rose by 3,664, while filings in Texas jumped by 7,123. There were also notable increases in applications in California, Georgia, Florida, Illinois, Indiana and New York.

“The rise in unemployment claims in the last two weeks, if sustained, would point to a rise in layoffs and a slowing in job growth but, at this point, fall short of signaling a yellow alert on the expansion of jobs,” said Conrad DeQuadros, senior economic advisor at Brean Capital in New York.

The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 20,000 to 1.775 million during the week ending June 3, the claims report showed. Still, the so-called continuing claims remain low by historical standards as some laid-off workers could be finding work easily, with 1.8 job openings for every unemployed person in April.

A fourth report from the Fed showed manufacturing output edged up 0.1% in May after surging 0.9% in April.

Manufacturing, which accounts for 11.3% of the U.S. economy, is being hobbled by higher borrowing costs as well as a shift in spending from goods to services.

But surveys of goods producers from the Federal Reserve banks of Philadelphia and New York on Thursday both showed the six-month business outlook at 15-month highs in June.

“There are most definitely cross-currents in today’s manufacturing sector,” said Tim Quinlan, a senior economist at Wells Fargo in Charlotte, North Carolina. “The parts of manufacturing tied to consumer and business equipment spending are evidently under pressure.”

Reporting by Lucia Mutikani; Additional reporting by Dan Burns; Editing by Chizu Nomiyama, Paul Simao and Andrea Ricci

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