By Lucia Mutikani
WASHINGTON (Reuters) - U.S. retail sales rebounded less than expected in February, suggesting a slowdown in consumer spending in the first quarter amid rising inflation and high borrowing costs.
The signs of slowing economic activity are, however, unlikely to spur the Federal Reserve to start cutting interest rates before June as other data on Thursday showed a larger-than-expected increase in producer prices last month.
The labor market also remains fairly tight. Fewer Americans applied for unemployment benefits last week and annual revisions to the weekly claims data showed laid-off workers were quickly finding new work and not spending as long a period of time on jobless benefits as had been previously thought.
"When the Fed is contemplating a series of rate cuts and is confronted by suddenly slower economic growth and suddenly brisker inflation, they will respond to the new news on the inflation side every time," said Chris Low, chief economist at FHN Financial. "After all, this is not the first time in the past couple of years consumers have paused spending for a couple of months to catch their breath."
Retail sales rose 0.6% last month, the Commerce Department's Census Bureau said. Data for January was revised lower to show sales tumbling 1.1% instead the previously reported 0.8%.
Sales in December were also downgraded. Economists polled by Reuters had forecast retail sales, which are mostly goods and are not adjusted for inflation, would rise 0.8% in February.
They increased 1.5% on a year-on-year basis in February.
Sales last month were boosted by a 1.6% rebound in receipts at motor vehicles and parts dealers. Sales at gasoline stations increased 0.9%, reflecting higher prices at the pump. Receipts at electronics and appliance outlets surged 1.5%. Building material and garden equipment store sales rebounded 2.2%.
But online sales dipped 0.1%. There were also decreases in sales at clothing, health and personal care stores. Furniture store sales decreased 1.1%. Sales at sporting goods, hobby, musical instrument and book stores were unchanged.
Sales at food services and drinking places, the only services component in the report, rebounded 0.4% after dropping 1.0% in January. Economists view dining out as a key indicator of household finances. Households are increasingly focusing on essentials and cutting back on discretionary spending.
"There's ultimately more competition for consumers' dollars today while still-high prices for frequent purchases like food and gasoline may be diverting discretionary funds, just as higher interest payments may also be somewhat crowding out consumption," said Tim Quinlan, a senior economist at Wells Fargo.
Retail sales excluding automobiles, gasoline, building materials and food services were unchanged in February.
This so-called core retail sales measure corresponds most closely with the consumer spending component of gross domestic product. Core sales for January were revised to show them decreasing 0.3% instead of the previously reported 0.4%. Core sales in December were revised lower.
The data and an unexpectedly flat reading in business inventories in January prompted the Atlanta Fed to trim its first-quarter GDP growth estimate to a 2.3% annualized rate from a 2.5% pace. The economy grew at a 3.2% rate in the fourth quarter, fueled by consumer spending.
Stocks on Wall Street were trading lower. The dollar rose against a basket of currencies. U.S. Treasury prices fell.
TIGHT LABOR MARKET
A separate report from the Labor Department on Thursday showed initial claims for state unemployment benefits fell 1,000 to a seasonally adjusted 209,000 for the week ended March 9. Economists had forecast 218,000 claims for the latest week.
The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 17,000 to 1.811 million during the week ending March 2.
The government revised the data for both initial and so-called continuing claims from 2019 through 2023. It also implemented new models to seasonally adjust both initial claims and continued claims this year and revised seasonal factors for both series from 2019 through 2023.
The level of continuing claims over the last year was revised sharply lower. Data for January and February were also downgraded, aligning with strong payrolls growth that period.
"The revised data for continued claims are consistent with a job market that is showing some signs of loosening but is still relatively strong," said Nancy Vanden Houten, lead U.S. economist at Oxford Economics.
The U.S. central bank has raised its policy rate by 525 basis points to the current 5.25%-5.50% range since March 2022, and is expected to start lowering borrowing costs by June.
Another report from the Labor Department showed the producer price index for final demand rose 0.6% in February after advancing 0.3% in January. Economists had forecast the PPI would climb 0.3%. A 1.2% jump in goods prices accounted for nearly two-thirds of the increase in the PPI. Wholesale gasoline prices rose 6.8%. Food prices were up 1.0%.
In the 12 months through February, the PPI shot up 1.6% after advancing 1.0% in January. The report followed news on Tuesday that consumer prices increased strongly for a second straight month in February.
Excluding food and energy, goods prices rose 0.3%, matching January's gain. This suggests that goods deflation, the major driver of lower inflation, was drawing to an end and services would need to pick up the slack in easing price pressures.
Services gained 0.3% in February after rising 0.5% in the prior month. A 3.8% increase in the cost of hotel and motel rooms accounted for a quarter of the rise in services prices. There were also increases in the costs of outpatient care and airline tickets. Portfolio management fees gained 0.2% after accelerating by 5.9% in January.
These are among the components that go into the calculation of the personal consumption expenditures (PCE) price indexes, the inflation measures tracked by the Fed for its 2% target.
Based on the CPI and PPI data, economists estimated that the core PCE price index increased 0.3% in February after gaining 0.4% in January. Core inflation is forecast to rise 2.8% in February, which would match January's gain.
"The Fed will start its cutting cycle in June," said Stephen Juneau, an economist at Bank of America Securities. "However, it will need to see more improvement in the upcoming inflation data to have enough confidence to begin to ease."