Retail sales unexpectedly fell in May for the first time in eight months, the Commerce Department said Friday, adding to signs that the U.S. recovery is slowing.
The 1.2% sales drop surprised analysts, who had expected a 0.2% rise after April's 0.6% gain. The decline raised fears that consumers, whose spending accounts for 70% of economic activity, will not be able to power the recovery as government stimulus wanes.
"For those of us who are forecasting a slowdown in growth in the second half of the year, this number is very consistent with that," said Keith Hembre, chief economist at First American Funds.
But analysts said the report's underlying details weren't as grim as the headline figure suggested.
Core sales — which exclude autos, gasoline and building materials — rose 0.1% after April's 0.2% drop. The government uses core sales to calculate the consumer spending in GDP reports.
Consumer spending growth has slackened in Q2 but is still on track to grow 3% this year, said Richard DeKaser, chief economist at Woodley Park Research.
"It ain't great but it's not too shabby either," he said.
The Reuters/University of Michigan consumer confidence index rose 1.9 points in June to 75.5 on an improved outlook for jobs and credit. That's the best level since the recession began in December 2007. Wall Street expected 74.5.
"But confidence remains very, very weak — they're still at levels that are consistent with a fairly deep recession," said Scott Hoyt, senior director of consumer economics at Moody's Economy.com.
Still, he said, "We're not overly worried about that" given the tenuous confidence-spending link.
The IBD/TIPP Economic Optimism Index for June, released last week, sank 5.1% to 46.2, below the boom-bust 50 mark.
High unemployment, currently at 9.7%, could dim the outlook for consumer spending. Employers added 431,000 jobs in May, but almost all of that was due to temporary census hiring. The private sector added just 41,000 jobs.
Ominously, the Economic Cycle Research Institute said Friday that its leading U.S. index fell in the week ended June 4 to the lowest in almost a year. The gauge's growth rate dived 3.8 points to -3.5%, the lowest since May 2009.
The decline "assures a significant slowing in U.S. economic growth in the coming months, (but) the recent weakness has not lasted long enough to signal a new recession threat," ECRI head Lakshman Achuthan said in a note.
May's retail sales drop was due mainly to a record 9.3% plunge in demand for building materials, likely due to the end of government stimulus programs such as the homebuyer tax credit.
Sales of autos and parts fell 1.1% even though dealers reported higher unit sales in May. Clothing sales fell 1.3% and gasoline demand sank 3.3% as fuel prices fell.
Among the few bright spots: Sporting goods stores' sales rose 0.4% while electronics and appliance retailers gained 0.6%.
Total sales rose 6.9% vs. a year earlier.
Stocks opened lower on the weak sales data, bounced back on the sentiment report, then rallied in the final hour. The Nasdaq rose 1.1% while the S&P 500 and Dow climbed 0.5%.