WASHINGTON — Consumers increased retail spending modestly last month, although economists anticipate more of a slowdown as higher interest rates and sagging consumer sentiment take a toll.

Sales at apparel and accessories stores increased a seasonally adjusted 0.2 percent to $17.6 billion in May from the previous month and rose 6 percent from a year earlier, according to a monthly Commerce Department report issued Tuesday. The gain slowed from April’s monthly advance of 0.5 percent.

Department stores sales grew 0.1 percent for the month to $17.8 billion, a performance that was on par with May 2005. Sales at department stores dipped 0.1 percent in April.

“[We’re] having a measured deceleration of retail sales,” said John Lonski, team managing director of the Moody’s Investors Service economic group. “As long as jobs continue to grow, consumer spending will avoid a jarring slowdown.”

The Labor Department reported last week that the overall economy added 75,000 jobs in May, compared with 126,000 in April. The May unemployment rate fell to 4.6 percent from 4.7 percent.

All retail and food service sales went up 0.1 percent in May — the slowest in three months — and 7.6 percent compared with a year earlier. May’s growth followed a 0.8 percent upswing in April.

The retail sales report, coupled with a 0.2 percent gain in the Producer Price Index, propelled a drop in U.S. stocks. The Dow Jones Industrial Average lost all its 2006 gains amid fears that the Federal Reserve Board will raise interest rates to curb inflation. Consumers are being hit by the higher rates as energy costs rise and the housing market cools off in many parts of the country.

The Federal Reserve Board will meet June 28 and 29 to decide if there will be another boost in the federal funds interest rate, which is 5 percent and influences borrowing rates on everything from car loans to home mortgages. The Conference Board said interest rates and high gasoline prices wore shoppers down last month, pushing its Consumer Confidence Index down to 103.2 from 109.8 in April.

“The underlying fundamentals supporting consumption spending are still very positive — good employment growth, coupled with private sector wage and salary gains cruising at just under 3 percent,” Global Insight U.S. economist Brian Bethune wrote in a report. “The persistence of high gasoline prices, coupled with lower equity prices and badly bruised consumer sentiment will effectively take the wind out of the sails of real consumer spending in the second quarter of 2006.”

This story first appeared in the June 14, 2006 issue of WWD. Subscribe Today.

Global Insight is predicting growth in real consumption spending to fall to 2 percent in the second quarter from 5.2 percent in the first quarter.

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