Retail slump in June hints at tired consumer

By Pedro Nicolaci da Costa

NEW YORK (Reuters) - Retail sales posted their steepest drop in nearly two years in June, according to government data on Friday, indicating the housing market slump and soaring gasoline costs are depressing consumer spending.

The Commerce Department reported a 0.9 percent decline in June sales where economists had looked for a 0.1 percent gain, far outweighing small upward revisions to the figures for May.

"The rise in gasoline prices absorbs a big chunk of spendable income," said Nigel Gault, director of U.S. economic research at Global Insight. "Consumers had to spend $53 billion more in the second quarter at an annual rate than they did in the first. Eventually they need to cut back somewhere else."

Consumer confidence did rebound in early July, but only after hitting a 10-month low in June. Historically, sentiment remains near levels experienced in early 2001, just before the economy entered a brief period of recession.

The Reuters/University of Michigan Surveys of Consumers said consumer sentiment rose in early July, with its index hitting 92.4 following June's final reading of 85.3.

There were also signs that inflation is creeping higher even as consumer demand weakens, with the Labor Department saying import prices rose for a fifth straight month as petroleum costs soared.

The conflicting signals from subdued sales and improved consumer moods left financial markets mostly at a standstill, with stocks narrowly mixed after the S&P 500 briefly flirted with an all-time high. The Dow had hit a record on Thursday.

U.S. Treasury bond prices rose following the retail data, although the advance was curbed by fears surrounding import prices.

In retail sales, some of the pullback was due to softer demand for cars, with sales dropping 2.9 percent. Excluding motor vehicles and parts, sales fell a more subdued 0.4 percent. A downtick in gasoline prices off May's records also contributed to softer gas station sales.

The numbers suggested a downtrodden housing market and costly fuel are crimping consumers' ability sustain the spending boom that has kept the economy chugging along in recent years.

Energy costs were also boosting prices of imports, something that could worry the Federal Reserve and prevent it from cutting interest rates even as the economy slows. Import prices increased 1 percent in June, compounding the prior month's 1.1 percent rise.

U.S. economic growth nearly stalled in the first quarter, although analysts believe it rebounded in the second. Businesses appeared to be boosting inventories despite the softness in consumer spending, with inventories rising 0.5 percent in May, the largest gain in 10 months.

The question now is whether inklings of a revival in the industrial arena and bustling corporate merger activity are enough to keep the economic expansion running.

News from the housing sector remained grim. Furniture and home furnishings sales were off 3 percent and building material and garden supplies sales fell 2.3 percent in June. Falling house values have hurt demand for home goods and furnishings, with both Sears Holding Corp. and Home Depot Inc. offering glum outlooks earlier this week.

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