U.S. retail sales were weaker than expected in June, but with tax cuts on the way, economists remain optimistic.

Total sales rose 0.2% in June, slightly slower than expected. However, excluding auto sales, sales dropped in the month. Deep discounts in auto dealer showrooms are thought to have helped boost sales.

“June sales gains were led by a 1.5% advance in auto sales, pushed by incentives. Electronics also did well for the first time in many months. But there were declines in a host of other categories, particularly in clothing. Gasoline station sales, which accounted for most of the upward revision in May, dropped on weaker prices in June,” says CIBC World Markets.

While June sales were slightly disappointing, May’s results were revised up to a 0.4% rise, against the initial report of 0.1%. Economists are expecting strong results in July, as tax rebates fatten consumer wallets. “Look for a sizeable gain in July’s retail sales figures, as the tax rebate checks start to roll in. The U.S. consumer is not finished yet,” says BMO Nesbitt Burns Inc.

CIBC agrees, noting, “Looking ahead, consumption should continue to be key to keeping the U.S. out of recession, but its going to take a protracted period of low rates and the tax cuts, to keep households spending at this pace as jobs decline.”

The other big data point today was U.S. producer prices, which came in down 0.4% in June, below the expected decline of 0.1%. BMO says, “The prices of most goods softened, particularly for energy and computers. Costs to U.S. producers are clearly on a downward track. The outlook for inflation is also favourable as prices at earlier stages of production are also falling back. Thus, the Federal Reserve can keep its focus squarely on the economy with little worry over inflation.”

CIBC concludes, “The ex-auto retail data were, including the revision, in line with our sub-consensus forecast. Long bonds got a small lift from the retail sales and PPI releases, but appeared to be waiting for more direction from Greenspan next week, and from the seesawing equity market.”