Unexpected Drop in Retail Sales a Sign of Trouble For Economic Recovery

Sales at U.S. retailers unexpectedly dropped in May for the first time since September, the Commerce Department said Friday, raising worries that the economy is struggling to recover from the worst financial meltdown since the Great Depression.

Americans slashed spending on everything from cars to clothing to building materials, as retail sales plunged 1.2% last month, following a 0.6% April gain that was larger than previously estimated.  It was the largest decline in eight months.

Retail sales were projected to increase 0.2%, according to the median estimate of 76 economists in a Bloomberg News survey.

Economists are concerned that consumers will start cutting back purchases as they continue to be rocked by high unemployment and uncertainty in the stock market. Consumer spending accounts for roughly 70% of total economic activity.

Concern over a slowing labor-market recovery is one reason why Americans might be reducing the pace of spending.

Companies added a paltry 41,000 workers in May, the fewest in four months and down from a 218,000 increase in April, the Labor Department reported last week. But employers increased hours and earnings, signaling workers kept the extra money to either pay off debt or boost savings last month.

"Our own view is that the labor market recovery will be a grudging one, that consumers will enjoy only modest gains in wages and salaries for some time and that consumer spending growth will therefore prove disappointing," Joshua Shapiro, chief U.S. economist at MFR Inc., an economic consulting firm in New York, told the Associated Press.

Discounters Target Corp. (NYSE: TGT) and The TJX Cos. Inc. (NYSE: TJX) were among merchants reporting gains in same-store sales, indicating households are searching for bargains to get the biggest bang for their buck.

The European debt crisis may give households another reason to curtail spending as the stock market tumbled in May from its April highs, reducing consumers' net worth. Stocks have nosedived since the crisis worsened, with the Standard & Poor's 500 Index dropping 11% since reaching a 19-month high on April 23.

The decline in sales was led by a 9.3% plunge at building-material stores.

The decrease followed an 8.4% jump in April and another in March that may have been sparked by a program in the government's stimulus package last year that promised rebates for purchases of more energy-efficient appliances. 

In an apparent contradiction of industry figures, purchases of automobiles dropped 1.7% last month. General Motors Corp. and Ford Motor Co. (NYSE: F) reported U.S. sales increases in May, topping analysts' estimates, as consumer confidence increased and cheaper gasoline drove customers to purchase more sport utility vehicles.

"We're ramping up production to meet continued strong demand for all of our launch vehicles as well as other products," Stephen Carlisle, vice president for U.S. sales at GM, told Bloomberg on June 2.

Some analysts warned against reading too much into the gloomy May sales report because the month-to-month numbers are too volatile.  But if future months continue to display weakness, it will force them to cut their estimates for overall economic growth in the second half of 2010.

"I don't think things are going into a nosedive. The economy is in recovery. The outlook is still moderately positive." David Sloan, a senior economist at 4Cast Inc. whose forecast of a 0.7% decline was the lowest among economists surveyed told Bloomberg. "[But] the strength of the consumer recovery was overstated."

News & Related Story Links: