As Retail Sales Climb, Consumers Stay Glum - WSJ

As Retail Sales Climb, Consumers Stay Glum - WSJ

By SARA MURRAY

Retail sales rose in January as consumers bought more electronics and appliances, but a separate consumer-sentiment index fell in February, highlighting the mixed signals coming from the economy.

The revival of consumer spending is a key to a broad economic recovery, because consumer spending accounts for about two-thirds of all demand in the economy.

The Commerce Department said Friday that retail sales climbed a moderate 0.5% in January from December to a seasonally adjusted $355.8 billion. The government also revised upward the December number, noting that sales fell 0.1%, less than the 0.3% decline reported previously.

"Retail sales did pick up fairly nicely in January, and that certainly is a good story," said Millan Mulraine, a TD Securities analyst. "Clearly, we are not at the point where we believe consumer spending will drive the U.S. economic recovery…but we do think at some point down the road that's likely to be the case."

Consumers are still feeling the sting of job losses and the difficulty getting access to credit, which fueled much of household spending during the boom a few years ago. But recent easing in job losses and improving credit conditions have helped Americans feel slightly more comfortable about spending, even though they remain cautious. Economists are hoping those incremental improvements will equate to stronger consumer spending in the first quarter.

The monthly retail sales numbers aren't adjusted for inflation. Economists' primary gauge of U.S. consumer spending—known as personal consumption expenditures—rose at an inflation-adjusted 2% annual rate in the fourth quarter. Based on the new data, economists at IHS Global Insight predicted consumer spending would grow at an inflation-adjusted 2.6% annual rate in the current quarter.

The increase in consumer spending touched most parts of the economy, except autos, where spending was flat. Excluding autos, sales rose 0.6% last month. "Core" retail sales, which strip out spending on autos, gasoline and building materials, climbed 0.8%. Electronics, appliance, general-merchandise, food and beverage stores, as well as non-store retailers, all experienced an increase in sales. Meanwhile, sales fell at home-furnishing and building-materials stores.

Consumers were likely lifted last month by fewer job losses and a slight boost to their incomes. The economy shed 20,000 jobs in January, and the unemployment rate dropped to 9.7%, the Labor Department said. The average workweek and weekly earnings also rose.

One way to gauge the weakness of this recovery is that economic indicators are still sending contradictory signals. Case in point: The University of Michigan/Reuters preliminary consumer-sentiment index fell in February, an indication that there are still bumps on the road to a consumer recovery. The index dropped to 73.7 from 74.4 in January, as Americans' expectations for the economy's future performance became more pessimistic. But it's not likely to be a permanent drop, analysts said.

"The damage has likely been done by the drop in stock prices, to which the index is quite sensitive, though usually with a short lag," said Ian Shepherdson, an economist for High Frequency Economics Ltd.

The portion of the index that reflects consumers' feelings on current economic conditions rose to 84.1 from 81.1 in January. But the gauge of where the economy is headed dropped to 66.9 from 70.1.