U.S. retail sales showed a miniscule gain in May, weighed down by weak gasoline receipts, the government said on Thursday. The results were a little weaker than expected, leaving economists anticipating further cuts to U.S. interest rates.

Data from the U.S. Commerce Department showed strong demand for clothing, furniture and appliances but overall the report painted a rather lukewarm economic picture.

Sales inched up 0.1% last month to $308.78 billion after a 0.3% drop in April. Excluding automobiles, sales also rose 0.1% to $234.29 billion following a 0.9% decline in the prior month.

“The broad gains in most categories suggest that a clearer picture of the trend might be best obtained by stripping out gasoline and vehicle sales declines. This leaves a solid 0.6% gain for the remainder of the retail categories. Not too bad an outcome,” says BMO Nesbitt Burns.

“On balance the slight improvement noted in today’s retail sales report is good news for the struggling U.S. economy,” says RBC Financial. “The end of war, record low interest and mortgage rates which have allowed consumers to turn their homes into ATM machines, an upturn in confidence and recently enacted tax cuts will all remain supportive to U.S. consumers.”

However, RBC notes there are some major obstacles for consumer spending as well. “Consumers are heavily indebted and have seen their wealth eroded over the past three years by the falling stock market. The weakening dollar will also curtail retail price cutting going forward. But perhaps the biggest concern is whether consumers can continue spending in the face of such a weak labour market. And as long as the job market does not improve, a real recovery will remain elusive. As such, the case for the Fed to cuts rates by 25 basis points on June 25 still remains on the table.”

In a separate release, new U.S. jobless claims fell 17,000 in early June. “But the 430,000 level of jobless claims provides little comfort that the labour market is improving,” says Nesbitt.

RBC points out that the four-week moving average rose to 433,750 from 431,500, “confirming that the labour market is still very weak. Claims need to drop below the 400,000 mark before the labour market can be considered on the mend.”

Also released today, May import prices fell 0.3%, slightly more than expected. Yet this is not a big deflation worry says RBC. “Even if import prices keep falling, imports are a small percentage of the overall U.S. economy (17%) and goods make up less than half of overall consumer spending. We may see falling imported goods prices for some time to come given trends in the geography of production, but the likelihood of this leading to overall consumer price deflation is remote,” it says. “On the positive side, export prices rose 0.1%, the fourth increase in five months, leading to improved terms of trade for the U.S. which should help push the trade deficit in the right direction.”

But, CIBC World Markets says that today’s data is “in line with the slow growth, disinflationary picture of the US economy”. It says, “The lack of momentum within the quarter suggests that a Q3 pick-up in consumer activity will lean heavily on the one-off boost from tax cuts and mortgage refinancing – not the stuff that sustainable expansions are made of.” So, CIBC believes that rates will drop another 50 basis points in the U.S. “We have long been calling for the Fed to take the half point cut in two separate quarter point steps, but if upcoming reports on trade and housing are soft, we would lean towards a one-time 50 bp reduction this month.”

Nesbitt is more upbeat, declaring that “The U.S. retail sales report continues the trend toward gradual improvement in the economic data. We suspect that the economy is picking up and that further easing by the Fed is unnecessary.” But, it expects a safety cut anyway, “The Fed will still ease, however, just to be sure.”

http://www.census.gov/svsd/www/retail.html