Retail sales show surprising gain in February

Martin Crutsinger, AP Economics Writer, On Friday March 12, 2010, 4:30 pm EST
WASHINGTON (AP) -- Retail sales posted a surprising increase in February as consumers refused to let snowstorms stop them from stepping up purchases for everything from clothes to appliances. The improvement provided hope that the recovery from the Great Recession is gaining momentum.

Some economists cautioned that spending increases will remain modest as long as wages stay flat and job creation weak. But others said the fourth gain in retail sales in five months meant consumers are starting to spend with more confidence.

"This is more than a one-month wonder," said Stuart Hoffman, chief economist at PNC Financial in Pittsburgh. "This is telling us that consumers, who had been tightening their belts throughout the recession, have now loosened them a notch."

For February, sales rose 0.3 percent, the Commerce Department said Friday. That surpassed expectations of a 0.2 percent decline.

The overall gain was held back by a 2 percent decline in auto sales, partly reflecting the recall problems at Toyota. Weakness in autos also caused a downward revision in January retail sales. They were reduced to an increase of just 0.1 percent, down from the 0.5 percent originally reported.

But outside of autos, sales rose a strong 0.8 percent in February. That was far better than the 0.1 percent rise economists had expected. And for January, excluding autos, sales gained 0.5 percent, just slightly below the 0.6 percent initial estimate.

Some analysts expressed concern about whether the spending gains can be sustained, given that unemployment remains high -- 9.7 percent in February -- and consumer confidence shaky. A separate report Friday showed that consumer confidence dipped to 72.5 in early March, down slightly from a February reading of 73.5, according to a Reuters-University of Michigan survey.

"Weak jobs growth, low wages growth and tight credit mean that any further acceleration in consumption growth is unlikely," Paul Dales, an economist at Capital Economics, wrote in a research note.

Prospects would improve if businesses, which have shed 8.4 million jobs since the recession began in December 2007, start rehiring laid-off workers. That would give households the incomes they need to support spending growth.

Economists said spending in both January and February likely gained support from higher tax refunds and tax credits paid by the government during the current tax filing season. Those increases reflect some of the tax relief included in the $787 billion economic stimulus package Congress passed last year.

Some analysts said the February retail sales report made them more confident that consumer spending -- which accounts for 70 percent of total economic activity -- will be enough to support moderate economic growth this year of around 3 percent.

"We needed the consumer to step up because that is the biggest part of the economy," said Sal Guatieri, an economist at BMO Capital Markets. "This retail sales report should go a long way toward alleviating fears that we might slip back into a recession."

The overall economy, as measured by the gross domestic product, began growing again last summer. That indicated the recession had ended. GDP growth surged at a 5.9 percent annual rate in the October-December quarter. About two-thirds of that surge came from a rise in manufacturing to supply goods for businesses that had let their stockpiles dwindle.

Consumer spending actually slowed a bit in the fourth quarter: It grew at an annual rate of just 1.7 percent. But some analysts said that, based on the January and February retail sales, consumer spending could strengthen in the current quarter and support a GDP gain of around 3 percent this quarter.

The February retail sales report showed widespread improvement. Sales at general merchandise stores, the category that includes department stores and big discounters such as Wal-Mart Stores Inc., rose 1 percent after a 1.3 percent rise in January.

Sales at appliance stores were up 3.7 percent. Sales at hardware stores rose by 0.5 percent. Furniture sales gained 0.7 percent.

Restaurants and bars enjoyed a 0.9 percent advance, their biggest gain in nearly two years. It suggested that snowbound Americans headed out to eat to get a break from their homes.

Some analysts had suspected that the February retail sales report could offer a positive surprise, given encouraging news last week from the nation's big retail chains. The International Council of Shopping Centers had reported that sales jumped 3.7 percent in February compared with a year ago. That marked the third straight increase and showed broad strength across all corners of retailing, indicating that consumers are starting to crawl back to where they had typically shopped before the Great Recession.

Shoppers shrugged off snowstorms to visit an array of merchants, from luxury retailer Nordstrom Inc. to middlebrow Macy's Inc. to discounter Target Corp. All three chains reported solid sales increases that beat analysts expectations. Another encouraging sign the reports showed was that shoppers are becoming more willing to pay full price, instead of focusing only on deeply discounted items.

During the height of the recession, shoppers, nervous about their evaporating stock portfolios and their jobs, had fled to discounters and cheaper brands. But even though extreme frugality is starting to thaw, shoppers remain cautious.

Zain Raj, global practice leader of Euro RSCG's retail brands division, noted that customers are starting to return to some of their brands and stores, but not for everything.

"Customers are picking and choosing where they're trading up," he said.

In a separate report, Commerce said business inventories were basically unchanged in January. Total business sales rose 0.6 percent, the eighth straight monthly increase.

AP Retail Writer Anne D'Innocenzio in New York contributed to this report.