Retail Sales Rebound Signals Thaw In Economic Activity

(Reuters) - Retail sales rose in March for the first time since November as consumers stepped up purchases of automobiles and other goods, suggesting a sharp slowdown in economic growth in the first quarter was temporary.

The Commerce Department's fairly sturdy report on Tuesday together with other data showing that producer inflation crept up last month should keep the Federal Reserve on track to start raising interest rates later this year.

An unusually snowy winter undercut activity early in 2015. Labor disruptions at normally busy West Coast ports, a stronger dollar and softer global demand also have hurt growth.

"A rebound in retail sales in March provides evidence that the U.S. economy is pulling out of a soft patch seen at the start of the year. The improvement in retail sales ... adds to the likelihood of policymakers voting to hike rates this year," said Chris Williamson, chief economist at Markit in London.

Retail sales increased 0.9 percent in March, broadly in line with expectations. That was the largest gain since the same month last year and snapped three straight months of declines that had been blamed on harsh winter weather.

The sales rebound, which was mainly driven by automobiles, furniture, clothing, building materials, restaurants and bars, was even more encouraging because of the big step back in job growth last month.

But retail sales excluding automobiles, gasoline, building materials and food services rose 0.3 percent after dropping 0.2 percent in February. The so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.

U.S. stocks traded marginally higher, with banking giants JPMorgan Chase & Co (JPM.N) and Wells Fargo & Co (WFC.N) reporting unexpectedly strong earnings but Johnson & Johnson (JNJ.N) announcing that it was cutting its full-year earnings forecast due to the impact of the buoyant dollar.

Prices for U.S. government debt rose, while the dollar was weaker against a basket ofcurrencies.

TEPID CONSUMER SPENDING

Last month's mild rebound in core retail sales and February's decline pointed to a slower pace of consumer spending in the first quarter.

That, however, was offset by a second report from the Commerce Department showing a relatively solid increase in retail inventories excluding autos in February.

Data including for retail sales, housing starts, inventories, trade and manufacturing suggest the economy grew at a sub-1.5 percent annual rate in the first quarter after a 2.2 percent pace in the October-December quarter.

But with household savings at their highest level in just over two years, thanks to a tightening labor market and cheaper gasoline, there is great potential for consumers to boost spending in the months ahead and cushion the economy against the strong dollar.

"Given the fading headwinds and the considerable war chest that consumers have accumulated in recent months ... we look for GDP growth to re-accelerate in the second quarter," said Millan Mulraine, deputy chief economist at TD Securities in New York.

In a separate report, the Labor Department said its producer price index for final demand rose 0.2 percent last month, with rising prices for goods accounting for more than half of the increase. The PPI had declined 0.5 percent in February.

In the 12 months through March, producer prices fell 0.8 percent, the biggest year-on-year decline since the revamped series started in 2009.

A key measure of underlying producer price pressures that excludes food, energy and trade services rose 0.2 percent after being unchanged in February. Core PPI was up 0.8 percent in the 12 months through March.

"From the Fed's perspective there may be a little reassurance here that the spillover from lower energy prices has been limited thus far," said John Ryding, chief economist at RDQ Economics in New York.

Low inflation and signs of a sharp slowdown in economic growth in the first quarter have prompted most economists to push back their expectations for the first Fed rate hike to either September or October from June. Others believe the U.S. central bank will only tighten monetary policy in 2016.

The Fed, which has a 2 percent inflation target, has kept its key short-term interest rate near zero since December 2008.