Retail sales rebound in May; trade deficit sets new record

Tuesday, June 15, 2004

WASHINGTON -- The appetite of America's shoppers returned in May, boosting sales at the nation's retailers by 1.2 percent, a fresh sign the economic recovery is on solid footing.

The latest snapshot of retail activity reported by the Commerce Department on Monday comes after a consumer pullback in April, which depressed retail sales by 0.6 percent. May's increase was slightly larger than the 1 percent rise some that economists were predicting and marked the biggest gain since March.

In a second report from the department, the U.S. trade deficit swelled to a record $48.3 billion in April, reflecting Americans' demand for foreign-made goods, especially cars, TVs, furniture and clothes.

April's trade deficit was 3.8 percent larger than March's shortfall, which had been the previous all-time monthly high. The rebounding U.S. economy has been supporting demand for imported goods.

Imports of goods and services rose by 0.2 percent in April to a record $142.3 billion. Exports, meanwhile, dropped by 1.5 percent to $93.9 billion, which nonetheless marked the second-highest level on record.

Higher imported crude oil prices also contributed to the trade deficit in April. The average price of imported crude oil rose to $31 a barrel, the highest since February 1983.

In the retail sales report, sales at automobile dealerships increased by 2.7 percent in May, an improvement from the 2.1 percent decline in April and the biggest gain since November. Excluding sales at automobile dealerships, retail sales went up by a solid 0.7 percent in May.

"As the economy continues to pick up steam, retailers are reaping the benefits," said Rosalind Wells, chief economist at the National Retail Federation.

Sales at clothing stores, department stores, health and beauty shops, sporting goods, music and book stores, and grocery stores all increased in May. However, sales of furniture and building supplies posted declines. People also ate out less, causing sales at restaurants and bars to dip.

Consumers play an important role in determining the vigor of the economic recovery. That's because their spending accounts for roughly two-thirds of all economic activity in the United States.

They have managed to spend at a modest pace even in the face of high energy prices. Looking ahead, economists believe consumers will keep their pocketbooks and wallets sufficiently open to support the recovery in the coming months.

In an encouraging note on that front, gasoline prices posted their first nationwide decline this year. The national average price fell by 6 1/2 cents to $2.04 per gallon on Friday, according to the Lundberg Survey of 8,000 gas stations released Sunday.

In May, sales at gasoline stations rose by 4 percent, the biggest rise since February 2003, reflecting higher prices at the pump. Still, even excluding the sale of gasoline, retail sales rose by a strong 0.9 percent in May.

"While high gasoline prices might be diverting some spending from other areas, the fact is that consumer demand remains strong overall," said Sherry Cooper, chief economist at BMO Nesbitt Burns.

With the economy growing solidly and the job market coming back to life, Federal Reserve Chairman Alan Greenspan and his Fed colleagues are widely expected to boost interest rates for the first time in four years at the end of a two-day meeting on June 29-30.

The Fed's main lever to influence economic activity for nearly a year has been at 1 percent, a 46-year low. Super low interest rates helped the recovery get on firm footing. Some economists predict the rate might rise to 1.75 percent or 2 percent by the end of this year. Even so, short-term borrowing costs for consumers would still be considered low by historical standards.

In the trade report, America's deficit with Canada widened in April to $5.7 billion, the highest level since January 2001.

The United States' politically sensitive trade deficit with China grew to $12 billion in April, the biggest since October 2003. The deficit with Japan, however, narrowed a bit -- to $6.4 billion from $6.7 billion in March. The April trade deficit with Korea -- $1.7 billion -- was a record high.

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