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Retail sales climb more than expected in August

Staff reports Updated: September 15, 2009 at 12:00 am

WASHINGTON — Retail sales jumped in August by the largest amount in more than three years, spurred by widespread gains beyond the expected increases of auto sales from the government's Cash for Clunkers program.

And while inflation at the wholesale level also rose last month as gasoline prices surged the most in a decade, the retail sales report is a sign that consumers may be less cautious about spending as the economy recovers. Consumer spending is closely watched because it accounts for about 70 percent of the nation's economic activity.

Economists were encouraged by the reports, but warned that jobs remain scarce and credit tight, making it difficult for consumers to mount sustained increases in spending.

"Big gains may be short-lived as the weak labor market will weigh on consumers into next year," Adam York, an economist at Wells Fargo Securities, wrote in a note to clients.

The Commerce Department said Tuesday that retail sales rose a seasonally adjusted 2.7 percent last month, after falling 0.2 percent in July. That's the largest gain in three-and-a-half years and beat analysts' expectations of a 2 percent increase, according to a survey by Thomson Reuters.

Excluding autos, sales rose 1.1 percent, ahead of an expected 0.4 percent jump. Excluding autos and gas, sales rose 0.6 percent, the most in six months.

In a separate report, the Labor Department said wholesale prices rose 1.7 percent in August, more than double the 0.8 percent rise economists expected. Wholesale prices had fallen by 0.9 percent in July. Both months were heavily affected by energy prices.

While many analysts believe the economy is staging a recovery in the current July-September quarter, the rebound is not expected to trigger inflation pressures because the labor market remains weak.

The Commerce Department report showed that auto sales soared 10.6 percent last month, the most in almost eight years, due mainly to the clunkers program. Gas station sales rose 5.1 percent, as prices at the pump rose. Economists expected increases in both categories, but sales also rose at electronics and appliance stores, department and sporting goods stores.

The clunkers program, which ended last month, provided consumers with rebates of up to $4,500 if they traded in older gas-guzzlers for new, more fuel-efficient models. The incentive boosted car sale 30 percent in August, after a 2.4 percent rise in July.

Many economists expect consumer spending to increase in the current July-September period, mostly because of the clunkers program. That could cause the economy to grow by as much as 3 to 4 percent in the third quarter, many economists expect, helping to end the worst recession since the 1930s.

But analysts worry that without consistent consumer spending growth, the recovery could weaken next year, as government stimulus efforts end.

Unemployment continues to rise, holding down wages and limiting the ability of consumers to spend. The unemployment rate, currently at a 26-year high of 9.7 percent, is expected to hit 10 percent by the end of this year and keep rising to around 10.3 percent next spring.

Drugmaker Eli Lilly & Co. said Monday that it will cut 5,500 jobs over the next two years, 14 percent of its work force, as it restructures the company into five units.

Treasury Secretary Timothy Geithner said Tuesday that the economy has improved in the past year but acknowledged in an interview on ABC's "Good Morning America" that the job market remains weak.

"I would say there's no recovery yet," he said. "We define recovery ... as people back to work, people able to get a job again, businesses investing again ... and we're not at that point."

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