Higher retail spending lifts hopes for U.S. economy

WASHINGTON -- Americans increased their retail spending in July by the most in five months, opening their wallets after a frugal spring and offering hope that the slumping economy may rebound in the second half of the year.

Retail spending rose in every major category, from electronics and sporting goods to furniture, building supplies and garden equipment. The report from the government followed one earlier this month that showed hiring strengthened in July.

Overall retail sales rose 0.8 percent from June to July, the Commerce Department said. It was the sharpest increase since February, and it followed three months of declines.

The stepped-up spending was evident in a flurry of retail earnings reports for the second quarter, which ended in late July.

Home Depot, the nation's largest home improvement retailer, said healthy sales of paint, bathroom accessories and kitchen installations helped lift its net income 12 percent.

Macy's raised its annual earnings guidance last week after reporting a 16 percent increase in net income in the second quarter. Macy's executives specifically cited a pickup in their teen clothing business, which had been weak.

TJX Cos., which sells discounted brand names under such store banners as T.J. Maxx and HomeGoods, said its second-quarter net income jumped 21 percent on better same-store sales.

"People are spending a little more and feeling a little better about the economy," said James Donnelly, a sales associate at Boston-based Tadpole, which sells infant wear, children's clothing and toys.

Donnelly says he's seen an increase in business and traffic in recent weeks. The store has run 40 percent discounts on summer merchandise. Shoppers are also buying some back-to-school items, like backpacks and clothing.

Americans appear to be taking their cues from the economy's modest but steady improvements.

Employers added 163,000 jobs in July, the best month for job growth since February. Home prices are up. The value of U.S. exports reached a record high last month. U.S. consumers are expressing more confidence. And stock indexes are near their highs for the year.

"I am looking for a better second half of the year, in part because I think business will become more confident, and they will increase their hiring," said Joel Naroff, chief economist at Naroff Economic Advisors.

Naroff predicts the government will revise growth in the April-June quarter to an annual rate of 2 percent, up from the 1.5 percent reported last month. He predicts growth will then accelerate to 2.6 percent in the July-September quarter and 3.3 percent in the final three months of the year.

Still, the overall economy remains subpar with the presidential and congressional elections less than three months away. Unemployment is high at 8.3 percent. Consumer spending on goods and services, which drives roughly 70 percent of growth, grew by only 1.5 percent in the April-June quarter, the weakest pace in a year.

Some economists cautioned that part of the July increase in retail spending was inevitable after consumers cut spending in each of the months in the April-June quarter. Consumers will likely sustain their spending increases only if hiring continues to strengthen, they said.

In the meantime, many Americans remain anxious about the job market, slow wage gains and high debts.

"Consumers hunkered down all through the spring, and then they came out in July and decided to do some overdue spending," said Chris Christopher, a senior economist at IHS Global Insight. "But until we see more months of spending gains, we should be very cautious about how we evaluate the situation."

A brighter outlook for the economy could make the Federal Reserve hold off on taking further action to boost growth when its policy committee meets in September.

The Fed signaled in late July that it was ready to act if growth and hiring stayed week. That led many economists to predict the Fed would announce a third round of bond purchases designed to push long-term interest rates down and generate more borrowing and spending in the economy.

"As long as you have signs that the economy is either holding its own or getting a little better, then the Fed doesn't have a reason to do anything," Naroff said.

Inflation does remain mild, which gives the Fed more leeway to act if it decides the economy needs further help. The Labor Department said in a separate report Tuesday that wholesale prices rose 0.3 percent in July from June. Lower energy prices offset sharp gains in the costs of food, cars and light trucks.

The most critical measure of the economy's health will be the August employment report released Sept. 7.

Over the past 29 months, U.S. companies have added 4.5 million jobs.

A new job gave Lan Smith and her husband more spending freedom this year. She had been unemployed for 18 months when she was hired in January as an administrative assistant for a not-for-profit.

The couple splurged this summer on a new chaise lounge and chairs for their living room -- their first furniture purchases in a decade. They also bought a new Honda Insight this year to replace their 9-year-old Hyundai Sonata.

The big purchases were a departure from the couple's strict budgeting that began in 2009. Still, Smith said they remain cautious as both she and her husband have lower incomes than they did 10 years ago. And their health care premiums recently went up.

"It feels like every time we take a step forward, we take a step back," she said.

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D'Innocenzio contributed from New York. AP Economics Writer Christopher S. Rugaber contributed to this report.