US retail sales rose 0.5 percent in December

WASHINGTON (AP) -- U.S. consumers increased their spending at retail businesses in December, buying more autos, furniture and clothing. Steady job growth and lower gas prices kept consumers shopping for the holidays, despite worries about potentially tax increases.

Retail sales rose 0.5 percent in December from November, the Commerce Department said Tuesday. That's slightly better than November's 0.4 percent increase and the best showing since September.

Sales of autos and auto parts rose 1.6 percent to lead all categories. Car companies closed out their best sales year since 2007.

Total retail spending was even stronger when factoring out a steep drop in gas prices.

And so-called core retail sales, which exclude gas, building materials and autos, rose 0.6 percent after a 0.5 percent increase in November. Economists pay closer attention to core sales because they strip out the most volatile categories and are a better gauge of consumer spending.

Two straight months of solid increases in core sales suggest consumers were not too worried about tense negotiations to resolve the fiscal cliff. Congress and the White House ultimately reached a deal on Jan. 1 that prevented income taxes from rising for most households.

Still, retail sales are likely to weaken in the first half of 2013 because lawmakers and President Barack Obama allowed a two-year reduction in Social Security payroll taxes to lapse. Most Americans will start seeing less money in their paychecks this month.

A person earning $50,000 a year will see take-home pay shrink by roughly $1,000 in 2013. That's likely to slow consumer spending and weigh on overall economic growth.

"Nothing in today's data does anything to dispel the notion that consumer spending the first half of 2013 should be quite weak," said Dan Greenhaus, chief global strategist at BTIG. "''The smaller paychecks will be anything but a welcome development."

Consumer spending drives roughly 70 percent of economic activity.

Even though consumers kept spending at the end of the year, most analysts predict overall economic growth weakened in the October-December quarter to an annual rate below 2 percent. That's largely because companies built up their stockpiles at a slower pace than over the summer. Faster restocking was a key reason the economy grew at an annual rate of 3.1 percent in the July-September quarter.

And growth in retail spending for all of 2012 ended up being less robust than the previous two years. Retail sales rose just 5.2 percent last year — slower than the 7.9 percent growth in 2011 and the 5.6 percent growth in 2010.

Earlier this month, major retailers reported that a last-minute surge in spending helped salvage the crucial holiday shopping season. Retails can often make as much as 40 percent of their annual revenue during the final two months of the year.

In addition to strong car sales, the government retail sales report showed consumers spent 1.4 percent more at furniture stores, 1.4 percent more at health and personal care shop, and 1 percent more at specialty clothing stores.

Sales were flat at general merchandise stores, a category that department stores such as Macy's and big retailers such as Wal-Mart and Target. But that followed a 0.8 percent decline in November.

The economy has shown some signs of improvement in recent months.

Job growth has been steady, although unemployment is still high at 7.8 percent. In December, employers added 155,000 jobs, roughly matching the monthly average in 2011 and 2012.

The once-battered housing market is recovering, which should lead to more construction jobs in the coming months. A gauge of U.S. service firms' business activity expanded in December by the most in nearly a year.