US economy looks weaker after subpar retail sales

WASHINGTON (AP) -- The U.S. economy appears to be weaker than many economists had thought after a report Monday showed consumers spent cautiously in June at retail businesses.

Americans bought more cars and trucks, furniture and clothes. But they cut back almost everywhere else. They spent less at restaurants and bars, reduced purchases at home improvement stores, and bought fewer computers and electronics.

Overall retail spending rose 0.4 percent in June from May, the Commerce Department said. But excluding volatile spending on autos, gasoline and building supplies, so-called core retail sales rose just 0.15 percent. That's the weakest gain since January.

Economists said the deceleration in retail sales could slow economic growth in the April-June quarter to an annual rate below 1 percent. That's weaker than many had thought and would be down from a tepid 1.8 percent rate in the January-March quarter.

Still, many economists aren't changing their forecast for the second half of the year. Most expect growth will rebound to around a 2.5 percent rate.

"Job growth, income growth, rising stock prices and higher home prices all suggest a healthier state for the household sector in the second half of the year," said Paul Dales, chief U.S. economist at Capital Economics.

Consumers are still increasing their spending. But their pace has dropped off sharply from the start of the year. Core retail sales increased from April through June at a 2.7 percent annual rate. That's down from a 4.2 percent rate during the first three months of the year.

The decline suggests an increase in Social Security taxes that took effect Jan. 1 may be starting to squeeze consumers. And that's slowing growth because consumers' spending accounts for about 70 percent of economic activity.

Other reports Monday added to worries that growth had weakened in the second quarter. Businesses increased their stockpiles only slightly in May, signaling fewer orders of factory-made goods.

And economic growth in China slowed in the April-June quarter to its lowest rate in more than two decades. That could reduce demand U.S. exports.

Dales, however, said the risk is low because China makes up only 7 percent of America's total market. The bigger threat to the U.S. economy is if dampened growth in China spreads to other nations that buy more U.S. goods.

Most analysts expect U.S. economic growth to bounce back in the second half of the year. The biggest reason for their optimism is an improving job market that should help offset the drag from the tax increase.

Employers have added an average 202,000 jobs a month this year, up 180,000 in the previous six months. Stronger job gains should increase overall income and boost consumers' spending.

Economists also point to a housing recovery that continues to gain momentum. That's lifting home prices, making Americans feel wealthier and more likely to spend. It's also adding construction jobs.

"Retail sales will continue to grow at a moderate clip, as gains in disposable income stemming from moderate job creation outweigh the lingering effects of payroll tax increases," said Martin Schwerdfeger, senior economist at TD Economics.

There were some encouraging signs in the retail sales report that consumers remain confident in the economy. Spending on cars and trucks rose 1.8 percent — the biggest gain since November. And furniture sales jumped 2.4 percent last month. Both gains show many consumers are still making large purchases.

Over the past year, car and truck sales have risen 11.4 percent, according to the government's data. That shows autos remain the most vibrant part of the retail economy.

Earlier this month the nation's automakers also reported robust sales in June. Sales totaled 7.8 million from January through June, the best first half since 2007. And the outlook for the rest of 2013 is just as strong. Wider credit availability and hot-selling new vehicles are helping to boost sales. Demand for big pickups has been a key factor in higher sales.

Monday's government report comes after some retail chains reported their best sales gains since January. Revenue at stores opened at least a year rose 4.1 percent in June compared with the same month a year ago, according to a preliminary tally of 13 retailers by the International Council of Shopping Centers.

June is typically when stores clear out summer merchandise to make room for fall goods. Brisk sales mean that stores probably won't be stuck with piles of summer clothes that need to be cleared as back-to-school sales kick off in late July.