Consumers have not pulled back aggressively despite the recent slowdown in the economy, retail sales data showed on Tuesday, and falling gasoline prices should support growth in the months ahead.

Retail sales fell in May for the first time in 11 months as auto sales took a hit from the damage wrought by Japan's earthquake, while other spending also softened.

Sales slipped 0.2 percent, the Commerce Department said, after a 0.3 percent rise in April.

However, the decline was less than economists' expectations for a 0.4 percent fall and sales excluding motor vehicles rose 0.3 percent. The data helped U.S. stocks to book their biggest gains in nearly two months.

U.S. government debt prices tumbled, with the yield on the benchmark 10-year Treasury note rising back above 3 percent.

Sentiment over the economy, which has been shattered by a recent string of surprisingly weak data, was also lifted by a separate report showing a moderation in wholesale inflation last month.

Consumers are not panicking. We should begin to emerge from the soft patch in the second half of the year; a lot of the drags on the recovery are fading, said Ryan Sweet, a senior economist at Moody's Analytics in West Chester Pennsylvania.

Economists are looking for second-quarter growth between 2 percent and 2.5 percent, supported by a narrower trade deficit in April, after a 1.8 percent pace in the first quarter.

The economy started the year on a soft note beset by bad weather and rising oil prices and limped into the second quarter as supply chain disruptions after Japan's earthquake in March took hold.

Disruptions to motor vehicle production, which left dealers with lean inventories and unable to offer customers incentives, pushed auto sales down 2.9 percent -- the largest decline since February 2010 -- and depressed overall retail sales.

Economists view the fall in vehicle production, which also slowed inventory accumulation by businesses in April, and weak sales as temporary.

WEAK GASOLINE PRICES TO HELP

Prices received by U.S. producers rose just 0.2 percent last month after rising 0.8 percent in April as gasoline prices fell. The drop in gasoline costs should come as welcome relief for consumers.

We are still looking at a month when gas was expensive. Now that gas has come down, people will have more money in their pockets, said Bill Cheney, chief economist at John Hancock Financial Services in Boston.

Receipts at gasoline stations rose 0.3 percent in May, the weakest rise since June. Gasoline prices have dropped to about $3.78 a gallon from just over $4 a gallon in early May.

High gasoline prices curbed discretionary spending in May, with electronics and appliance sales posting their largest decline in over a year.

Best Buy Co Inc, the largest U.S. electronics chain, on Tuesday reported its fourth straight quarter of same-store sales declines on weak demand for televisions.

At the same time, however, Best Buy kept its profit outlook for the year, citing strong demand for mobile phones and tablet computers.

A survey on Tuesday showed chief executive officers of large U.S. companies were less confident about the economy in the second quarter.

The slowdown in economic activity comes at a time when there are few options for further monetary or fiscal stimulus.

The Federal Reserve is due to conclude its $600 billion government bond-buying program at the end of the month and policymakers, who have faced intense criticism for risking inflation, have set the bar very high for a new program.

At the same time, the government is looking at ways to slash a huge budget deficit.

Talks between the Obama administration and lawmakers aimed at finding common ground to cut the red ink while agreeing to increase the $14.3 trillion limit on the nation's debt, resumed on Tuesday.

SOFT CONSUMER SPENDING

The retail sales report painted a generally weak picture of consumer spending, though sales at building materials and garden equipment suppliers rose 1.2 percent.

Core retail sales, which exclude autos, gasoline and building materials, rose 0.2 percent in May after advancing 0.3 percent in April.

Core sales correspond most closely with the consumer spending component of the government's gross domestic product report, which showed growth at a 2.2 percent annual pace in the first quarter.

It's looking like a relatively soft quarter for the consumer, probably 1.5 percent in terms of consumer spending, said Keith Hembre, chief economist at Nuveen Asset Management in Minneapolis, Minnesota.

(Additional reporting by Pedro Nicolaci da Costa in New York; Editing by Dan Grebler)

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