U.S. retail spending boosted by car sales

U.S. retail sales edged higher in June, rising 0.4 per cent from May largely on the strength of auto sales.

That number was lower than analysts' expectations, highlighting the slow pace of recovery in the U.S. and another sign that it may be too soon for the Federal Reserve to raise interest rates.

Consumer spending continues to drive U.S. economic growth and job creation, despite a rise in taxes, according to the monthly report from the Commerce Department.

Spending up on furniture, clothing, cars

Americans spent more on cars, furniture and clothing in June. Auto sales rose 1.8 per cent, the highest number since November and service station sales were also up 0.7 per cent, propelled by the rise in gas prices.   

Furniture sales jumped 2.4 per cent on the month, as consumers start to consider big ticket items and clothing stores and general merchandise stores, which include Target and Wal-Mart, also saw growth.

But department store sales fell 1 per cent. And sales at home improvement stores, such as Home Depot, dropped 2.2 per cent — although those sales are up nearly 10 per cent over the past year.  

So-called core sales, which strip out volatile items such as automobiles, gasoline and building materials, edged up just 0.1 per cent after rising 0.2 per cent in May. That was a disappointment to economists, who closely watch this number.

"It provides no additional evidence that the economy is gaining momentum," Annalisa Piazza, a senior economist at Newedge Strategy in New York, told Reuters.

"It doesn’t allow the Fed’s chairman to have a firmer tone as the U.S. economic recovery remains gradual."

When will the Fed move on interest rates

The Fed is debating cutting back the $85-billion (U.S.) in bonds it is purchasing each month to keep borrowing costs low and stimulate the economy. Fed Chairman Ben Bernanke said last month the central bank would start tapering its purchases later this year and would likely bring the program to a complete close by the mid-2014, but that depends on the pace of the economic recovery.

U.S. gross domestic product grew at a weak annual rate of 1.8 per cent in the first quarter, but most economist expect a modest rebound in the second half of the year.  

A Conference Board of Canada report released today predicts the U.S. will expand by two per cent this year and 3.2 per cent in 2014, a sharper rise than previously predicted. It says housing sales will lead the way for the next two years.

Higher taxes and steep cuts in government spending will cut 1.5 percentage points from real GDP in 2013, the Conference Board said in its forecast. But the impact of those changes should have worn off by the end of this year.

In the past year, auto sales have been the high point of U.S. retail spending, with car and truck sales are up 11.4 per cent, according to the government's data. Canadian auto sales have followed suit.