July 14, 2004

WASHINGTON (Reuters) — U.S. retail sales slid a larger-than-expected 1.1% in June, the Commerce Department said Wednesday in a report showing the American consumer struggling to deal with rising fuel costs.

In a separate report that may ease inflation concerns, the Labor Department said prices of goods imported into the United States unexpectedly dipped 0.2% in June. Export prices fell 0.6%, their first decline in nearly a year.

The June retail sales decline was the largest since a matching drop in February 2003. Stripping out a slide in auto sales — which accounted for much of the fall in the headline number — retail purchases edged down 0.2%.

Both measures were weaker than anticipated by Wall Street economists, who had projected a 0.6% drop overall and a 0.2% rise in sales aside from autos. The weak data may cause analysts to cut their forecast for second-quarter economic growth.

Taking some of the sting out of the retail report, however, were upward revisions to May data. The Commerce Department said retail sales in May were up 1.4% overall and 0.9% excluding the auto sector. May sales were previously reported as up 1.2% overall and up 0.7% ex-autos.

Treasury bond prices initially rallied on the unexpectedly soft June figures but then lost ground as traders eyed the May revisions and took profits from the earlier climb.

Blue Chip stocks were slightly higher late morning while the technology-heavy Nasdaq composite eased a little, but traders said stocks were chiefly keying off corporate news.

"The retail sales data are a little weaker than expected and they were expected to be weak. ... Even excluding auto transactions, the numbers were weak," said Patrick Fearon, economist with A.G. Edwards & Sons in St. Louis.

"The fact that gasoline prices have been up, coupled with the fact that the bulk of tax refunds may have already been spent, may have contributed to this. But we still feel fairly confident in the health of the consumer sector," he added.

High gasoline prices weigh on spending by reducing the amount consumers have to spend on other items.

In June, auto sales plunged 4.3% — their worst showing since February 2003's 4.6% decline.

But other categories also softened. Department store sales fell 0.8%, while sales at clothing stores dropped 0.5%. Purchases at gas stations reversed part of a big jump in May, falling 0.9%. Restaurants and bar business declined 0.8%.

The broad economy has been showing signs of slowing from its rapid pace of growth in the latter half of 2003 and early this year. The Federal Reserve still felt confident enough that the recovery would keep its footing to raise interest rates by a quarter percentage point in June.

But analysts were divided on whether the retail report was a red flag for the economy or a one-month aberration.

"We lean strongly toward the 'blip' theory. Already, automakers have slapped on more aggressive incentives, and the prevailing view in the industry is that, with inventories bloated, motor vehicle sales will surge this summer," said Stephen Stanley, chief economist with Greenwich Capital Markets, in a note to clients.

But Robert Brusca, chief economist with Fact and Opinion Economics in New York, was more pessimistic. "You see the gathering gloom. It's a question mark about consumers. There's a lot of weaknesses across a lot of categories," he said.

"This reduces the prospect for second-half growth."

Big U.S. retailers earlier this month reported weak June sales, blaming energy costs and the effects of cooler weather, which dampened purchases of summertime items.

Minneapolis-based discount retailer Target (TGT) expects July sales to rise a scant 1% to 2%. Wal-Mart (WMT), the world's largest retailer, said it was expecting a 2% to 4% gain in sales, but cautioned that high gasoline prices continue to drag on consumer spending.

In another economic report, the Mortgage Bankers Association said its weekly index of mortgage borrowing fell 6.3% last week as demand eased for floating-rate home loans and a holiday-shortened week.

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