US Retail sales look strong, with a solid gain in May and upward revision to prior month

By guest author Greg Robb, Senior Economics Reporter of Market Watch

Worries of economy weakening fade as retail sales now up three months in a row

The numbers: Reports of the death of the American consumer were greatly exaggerated after U.S. May retail sales data rose at a healthy pace and the decline in the prior month was revised to show a gain.

U.S. retail sales increased 0.5 % in May, with broad-based gains, the US Commerce Department said Friday. Economists polled by MarketWatch had forecast a solid 0.7 % gain.

There was a big rise in auto sales, but retail sales excluding the sector rose 0.5 %, the government said.

April sales were revised up to a 0.3 % gain from the initial report of a 0.2 % fall.

Shoppers in Chicago (caption courtesy of Market Watch)

What happened: Almost all categories showed solid gains in May. The only declines were food and beverage stores, department stores, miscellaneous stores and clothing.

Electronic store sales jumped 1.1 % in May. Health and personal care stores also had a strong sales gain.

Auto sales rose 0.7 %. They account for about one-fifth of all retail sales. Retail sales excluding autos and gas also rose 0.5 %.

“Nonstore” retail sales rose 1.4 % in May, the strongest gain since January.

Big picture: Retail sales have been choppy this year, raising some doubts about the health of the overall economy. Economists have been counting on consumers to keep spending at a level to prolong an expansion that will set a record for the longest ever later this summer.

The solid report may allow the Federal Reserve to wait a bit before cutting interest rates. After the weak job report for May, some economists thought the Fed might ease as soon as next week to bolster what was perceived as a slowing economy. The market is now expecting the Fed to cut rates in July. Some prominent economists, like the team at Goldman Sachs, think expectations of a rate cut over overdone and the central bank will remain on hold this year.

Economists said real consumer spending was up at more than 4% annual rate in the second quarter, after a smallish 1.3 % gain in the first quarter.

What they are saying: “The consumer is firmly back on track: the first quarter’s softness was misleading,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

Market reaction: The yield on the 10-year Treasury note TMUBMUSD10Y, +0.00 % rose roughly 1 basis point to 2.107 after the strong report. The Dow Jones Industrial Average DJIA, -0.07 %  was set to fall at the open on lower chances of a rate cut this summer.