After early-year skid, U.S. economy gains traction

WASHINGTON - Americans are spending more on cars, clothing and other products, a sign the improving job market and uptick in hourly wages is helping boost retail sales.

The Commerce Department says retail sales climbed a seasonally adjusted 1.2 percent in May, following a 0.2 percent gain in April. Sales have risen 2.7 percent over the past 12 months.

The upswing in shopping reflects greater confidence in the economy. Consumers upped their spending by more than 2 percent last month at auto dealers and building materials stores. Employers have added more than 3 million jobs over the past year, but until May many workers appeared to be saving as much of their paychecks as they could.

"These data reinforce our view that the underlying trend in growth remains solid -- more than solid enough to keep the unemployment rate trending down," said Jim O'Sullivan, chief U.S. economist with High Frequency Economics, in a client note.

Excluding the volatile categories of autos, gas, building materials and restaurants, sales rose a solid 0.7 percent.

The jump in retail spending and signs of growth in the services sector shows that consumption in the first quarter was stronger than previously thought, said Paul Ashworth, chief U.S. economist with Capital Economics. The U.S. Commerce Department said last month that gross domestic product shrank 0.7 percent in the first three months of the year.

But Ashworth said in a note that the surge in retail spending means "it is now possible that GDP didn't actually contract in the first quarter."

Consumers upped their spending by more than 2 percent last month at auto dealers and building materials stores, evidence that they're making longer-term investments in their daily commutes and homes.

The figures confirm the strength seen in separate reports on autos and housing. People bought cars and trucks last month at an annual pace of 17.8 million, the fastest rate since July 2005, according to industry analyst Autodata Corp. The number of newly built homes being purchased has surged nearly 24 percent year-to-date, according to the government.

More Americans are also upgrading their wardrobes. Thursday's report showed that shopping at clothiers also rose 1.5 percent last month.

Sales at gasoline stations increased 3.7 percent, largely reflecting the higher costs of gas since April. Prices at the pump rose by roughly 14 cents a gallon last month to $2.74 during Memorial Day weekend, according to AAA's Daily Fuel Gauge Report.

Excluding the volatile categories of autos, gas, building materials and restaurants, sales rose a solid 0.7 percent.

Spending growth at restaurants was subdued last month, inching up just 0.1 percent. But over the past year, restaurant and bar receipts have surged 8.2 percent.

Economists watch the retail sales report closely because it provides the first indication each month of the willingness of Americans to spend. Consumer spending drives 70 percent of the economy. Yet retail sales account for only about one-third of spending, with services such as haircuts and Internet access making up the other two-thirds.

Job gains over the past year have driven down the unemployment rate to 5.5 percent from 6.3 percent in May 2014. Still, many Americans were hesitant to spend as their incomes were barely rising above inflation. Average hourly earnings grew 2.3 percent over the past 12 months, a pace that has recently accelerated but remains below the 3 percent level typical in a healthy job market.