Auto sales boost otherwise weak retail sector

By MARTIN CRUTSINGER and CHRISTOPHER S. RUGABER, AP Economics Writers

WASHINGTON (AP) - Americans spent less at most retail stores in July and inflation remained tame as high unemployment and weak job growth fueled fears of a slowing economic recovery.

A busy month for car dealerships and higher gas prices was enough to lift overall retail sales 0.4 percent last month, the Commerce Department said Friday. It was the first overall gain in three months.

Still, most retailers reported declines. Excluding autos and gasoline sales - which accounted for one-fourth of the July figures - retail sales fell 0.1 percent last month. Sales were down 1 percent at department stores and also dropped at specialty clothing stores, furniture stores, hardware stores and appliance stores.

"While retailers have seen a solid gain in activity compared to last year, the more recent three month trend has been negative and that is not good news," said Joel Naroff, president of Naroff Economic Advisors.

The Consumer Price Index rose 0.3 percent in July, the Labor Department said. But that was mostly because of rising gas and food prices. Stripping out those two volatile categories, the so-called "core" index increased 0.1 percent. Over the past year, consumer prices rose 1.2 percent - the slowest pace in 44 years.

The Commerce Department also reported that inventories held by businesses rose for a sixth straight month in June. But inventory sales declined for a second month in a row, another sign of weak demand among consumers.

Auto sales represent such a large portion of monthly data and gas sales change rapidly from month to month. So economists prefer to look at the retail sector without those two categories. And retail sales figures are not adjusted for price changes.

Broad declines in other retail sales have economists concerned that spending will slow further in the second half of this year. Households are saving more and spending less as they struggle with high unemployment and lackluster job growth.

Economists note that the government revised activity in the previous two months to show slightly smaller decreases. But overall, the declines for most retailers in July suggest the recovery is losing momentum.

"There is only one thing that's for sure - economic momentum has slowed," said Jennifer Lee, senior economist for BMO Capital Markets.

The July increase in retail sales followed declines of 0.3 percent in June and 1 percent in May. Sales had surged 2.1 percent in March but since that time consumer spending, which accounts for 70 percent of the economy, has weakened.

Summer promotions and easier credit lured shoppers back to car buying last month. Nissan, Toyota, Volkswagen, Subaru and Kia reported the biggest gains. The industry sold more than 1 million cars and light trucks. That's 5.1 percent higher than in July 2009. Last year auto sales fell to the lowest level in three decades.

Sales at gasoline stations rose 2.3 percent in July, the biggest jump since last November. But much of that strength reflected higher prices.

Prices are rising at the slowest pace in 44 years, well below the Federal Reserve's inflation target. Core prices moved up 0.9 percent in the past year for the fourth month in a row.

July's modest increase in consumer prices may quiet deflation concerns raised in recent weeks by some Federal Reserve officials. Deflation is a widespread and prolonged drop in the price of goods, real estate and stocks. It also reduces wages and can make it harder to pay off debts.

The last serious case of deflation in the U.S. was during the Great Depression. Most economists don't believe deflation will happen. But they are watching consumer prices closely for any signs of it.

(Copyright 2010 by The Associated Press. All Rights Reserved.)