Retail sales jump by largest amount in 6 months

WASHINGTON -- The stimulus checks are working. A big increase in retail sales signaled people are spending their rebate payments, helping to ward off a serious economic slump, at least for now.

The Commerce Department reported Thursday that retail sales soared 1 percent last month, double what had been expected. It was the largest increase since November and represented strong sales at a variety of retailers including the biggest increase at department stores and other general merchandise stores in a year.

The May increase, double what economists had been expecting, provided the strongest evidence yet that the economy is getting a major boost from the $50 billion in economic stimulus payments the government sent out by the end of May, slightly less than half of the $106.7 billion scheduled to be sent out this year.

The Bush administration is hoping the stimulus payments will offset the gloom from a prolonged slump in housing, a severe credit crisis, soaring energy bills and rising layoff notices and keep the country out of a deep recession.

Highlighting the pressures on the job market, the Labor Department reported Thursday that new applications for jobless benefits rose by 25,000 last week to 384,000, the highest level since March. It was a much bigger increase than expected and came after news last week that the unemployment rate in May jumped by the largest amount in 22 years, up to 5.5 percent from 5 percent in April.

Stocks finished higher Thursday but well off their highs for the session after a resurgence in oil prices cut into Wall Street's enthusiasm for the bigger-than-expected jump in retail sales. The Dow Jones industrial average rose 57.81 points to close at 12,141.58.

The big rise in May retail sales and upward revisions showing stronger sales than previously reported in March and April left economists feeling more secure that the economy is still skirting by the current slowdown without a full-blown recession.

"For now at least, the tax rebates are trumping the higher energy and food costs and the other problems consumers are facing," said Mark Zandi, chief economist at Moody's Economy.com. "People are spending the money and not saving it or paying down debt."

Nigel Gault, an economist at Global Insight, had been expecting the overall economy, as measured by the gross domestic product, to be just barely positive in the current April-June quarter, with GDP growth of 0.2 percent. But after the retail sales report and the upward revisions to previous months, he said GDP growth could come in around 1 percent.

"The landscape has completely changed with the report on retail sales," he said. "This just changes the whole picture."

But Gault cautioned that there could be a payback down the road once the boost from the rebate checks begins to wear off later this year. However, other economists said the good boost to sales so far held out hope that consumer spending will remain strong through the summer.

"Recession? What recession," asked Joel Naroff, chief economist at Naroff Economic Advisers. "Households may be complaining about the cost of living, but they are still buying an awful lot of things."

The retail sales report showed that general merchandise stores, which include department stores and discount stores such as Wal-Mart, saw sales rise by 1.2 percent, the best showing since a 2.1 percent rise in March 2007. Sales were also strong at stores selling appliances and electronics, building materials, sporting goods and health care products.

Sales at gasoline stations surged by 2.6 percent, an increase that reflected soaring pump prices. But even excluding that big gain, retail sales would have risen by a solid 0.8 percent.

Auto sale rose a modest 0.3 percent, only a tiny rebound after a huge 2.1 percent plunge in April as demand in this area is being battered by soaring energy prices that has cut into sales of pickup trucks and sport utility vehicles.

Economists said the strength in retail sales made it even less likely that the Federal Reserve will feel the need to cut interest rates further and could raise prospects that rates will be going up sooner than previously expected as the central bank switches to worrying about inflation. In a speech this week, Fed Chairman Ben Bernanke said the Fed would "strongly resist" any tendency for Americans' expectations about inflation to become unsettled.