US retail boosted by rebate cheques

Cash from government stimulus cheques helped push US retail sales up at twice the rate expected last month but the strength could be fleeting as households contend with soaring prices and the worst housing slump in decades.

The full percentage point gain in retail sales last month reported by the Commerce Department surprised financial markets and bolstered bets the Federal Reserve would begin to bump up interest rates this fall to tamp down inflation.

Economists, however, did not view the data as suggesting a fundamental shift in an otherwise weak spending trend.

"Apparently, a lot of households were simply not in a position to save the rebates amid soaring costs of living, notably higher energy prices. Others enjoyed the temporary increase in their spending scope and bought electronics or clothes," said Harm Bandholz, economist at Unicredit Markets and Investment Banking in New York.

The US Treasury last Wednesday announced it paid about €31 billion in tax rebates to American consumers during May, eclipsing the €2.5 billion increase in sales. Cheques for up to €388 per adult and €194 per child will be sent through early next month.

"It is impossible to know just how much of the sales improvement last month was due to the €32 billion in stimulus payments that had been distributed by the end of the month," said Nigel Gault, chief US economist at Global Insight.

In the report, higher gasoline prices gave a lift to service station sales, but even with those stripped out, retail sales rose a strong 0.8 per cent, the biggest increase in a year as consumers bought a range of goods, including clothing, sporting goods and electronics.

But even with the boost in consumer spending, which fuels roughly 70 per cent of total economic output - conditions in the labour market are deteriorating.

A separate Labour Department report showed more workers than expected signed up for unemployment aid last week. Economists expect there to be little improvement, particularly with the wave of planned auto plant shutdowns.

Excluding autos, sales rose 1.2 per cent, the biggest rise in six months and well beyond the 0.7 per cent rise economists were expecting. Taking out autos, building materials and gasoline, sales rose a steady 0.8 per cent during the month.

But even with all these increases, economists did not expect a long-term upward trend.

"In our view, the tax rebates are temporarily boosting sales," said Ian Shepherdson, chief economist at High Frequency Economics in Valhalla, New York.

New applications for state jobless benefits jumped to 384,000 last week from a revised 359,000 for the prior week, the Labour Department said.

Analysts polled by Reuters were expecting a much smaller rise.

The four-week average of new jobless claims, which is considered a better gauge of employment trends because it irons out weekly volatility, climbed to 371,500 from 369,000 the prior week.

"The key point here is that the underlying trend in claims continues to grind higher, as it should at this point in the cycle," Mr Shepherdson said.

Higher oil prices are adding some inflationary pressures to the US economy, import prices rose 2.3 per cent last month as expected, capping the biggest three-month increase in more than 17 years, another Labour Department report showed.

The 7.9 per cent three-month rise in import prices was the largest since October 1990.

During April, business inventories rose 0.5 per cent in April, more than expected, while sales were their strongest since November, a separate Commerce Department report showed.

Wall Street analysts were expecting a 0.3 per cent gain in April.

In anticipation of a boost in spending from consumers with rebate cheques in hand, retailers increased their stocks by 0.4 per cent in April.