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Retail spending tumbles in June

July 14, 2007|From the Associated Press

WASHINGTON — Weak sales of autos, furniture and building supplies fueled a decline in retail spending in June, the Commerce Department said Friday

The 0.9% drop in overall retail sales was the biggest since August 2005, the government said.

The report followed June sales data from individual retailers on Thursday, when some upbeat results from retailers including Wal-Mart Stores Inc. and Target Corp. sparked a big rally in the stock market.

The overall sales data from Commerce reflected a 2.9% fall in auto sales as Detroit struggled with sluggish demand because of high gasoline prices.

Even excluding auto sales, retail sales were off 0.4%, the poorest showing since September.

Part of the weakness was seen as the consequence of a surprise 1.5% increase in spending in May. But the decline in June also was interpreted as an indication that consumers were cutting back under a barrage of higher prices and a slump in home values.

"Consumers are increasingly cautious in the face of higher gasoline and food prices and slowing home-price gains," said Mark Zandi, chief economist at Moody's Economy.com.

But two gauges of consumer confidence gave conflicting signals Friday. An index tracked by RBC Capital Markets fell to its lowest point in nearly a year, while the University of Michigan/Reuters survey rebounded to a six-month high, an increase attributed to a retreat in gasoline prices in late June.

The economy's growth rate slowed to a dismal 0.7% in the first quarter, but was believed to have rebounded significantly in the second period, to above 3%.

Analysts said, however, that the dip in June retail sales would provide a weaker starting point for the current quarter. Some forecast that growth in the second half of the year would slip to around 2.5% as the slump in housing persisted.

Falling home prices in many parts of the country are taking away a key element of support for spending, economists say. Sharp home-price appreciation over the last five years had boosted spending by making homeowners feel wealthier and allowing them to take out home equity loans to finance purchases.

"Consumers have been living beyond their means and they are now starting to slow down," said David Wyss, chief economist at Standard & Poor's in New York.

A separate report Friday showed that an effort by businesses to reduce unsold inventories -- which contributed to the slow first-quarter growth -- seemed to be turning around. Inventories grew by a better-than-expected 0.5% in May.

A rebound in inventory-building, gains in U.S. exports and strength in commercial real estate should help the economy offset the slowdown in consumer spending in the near term, analysts said.

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