By  on June 14, 2007

WASHINGTON — Consumers largely brushed off higher gas prices last month, driving up seasonally adjusted specialty store sales 2.7 percent, compared with April, as department stores registered a 1.3 percent rise.

Sales at all retail and food service businesses rose 1.4 percent, the largest increase in 16 months and more than double what economists were forecasting. The boost reversed a 0.1 percent decline in April, when unseasonably cool weather and an early Easter conspired against stores.

Shoppers' appetite to spend despite prices at the pump — a gallon of regular sold for an average of $3.09 in May compared with $2.78 in April, according to the American Automobile Association — triggered a surge Wednesday on Wall Street. The Dow Jones Industrial Average jumped 1.4 percent to 13,482.35. The S&P Retail Index advanced 1 percent to 518.36.

In addition, the Federal Reserve's Beige Book survey said economic activity was picking up, based on anecdotal information collected before June 4.

"Overall, the retailers are not in bad shape, they're just not market leaders right now," said Bill Rhodes of Rhodes Analytics, a research firm in Boston. "The market is going to be following this pretty closely. This was a wake-up call."

Specialty stores have been outpacing department stores, which is a sector in transformation as Macy's has grown into a national retailer after its acquisition of May Department Stores Co.

Compared with a year ago, department store sales fell 0.7 percent in May to $17.6 billion, as apparel and accessories stores posted a 7.8 percent increase to $19.1 billion, according to the Commerce Department.

Same-store sales reports from retailers last week showed an overall uptick, though merchants catering to the luxury customer, such as Saks Fifth Avenue, fared better than more moderate chains, including Macy's and J.C. Penney.

"Apparently, we were all buying stuff at the smaller stores and not spending money at the big retail chains," said David Wyss, chief economist at Standard & Poor's, pointing out the disparity between the large companies reporting same-store sales and the broader Commerce figures.

"There's no sign that we're stopping," said Wyss. "Consumers are out there spending more than they've got, so I think we'll continue to live beyond our means. It can't go on forever. We do have to slow down at some point."Along with the ready access to credit, the job market — a key economic ingredient for consumer spending — was relatively strong last month with 157,000 new jobs and unemployment of 4.5 percent.

The Fed's Beige Book showed that the economy generally expanded in late April and May. Offering anecdotal readings from businesses in the Fed's 12 districts, the report also found consumers spending more, especially on luxury items.

In Philadelphia, for example, luxury retailers outside of the jewelry business showed double-digit growth, while low-end merchants showed little to no increase and malls reported less traffic, but higher average purchases.

The report said that an apparel and sporting goods merchant in the Boston area noted that although sales have been mixed over the last few months, same-store sales for the year were up more than 5 percent.

"You can't divorce people from their spending habits," the merchant said.

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