Retail Sales Fall for Second Time in Three Months
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By Jason Lange,
Reuters
April 12, 2013

U.S. retail sales contracted in March for the second time in three months and consumer confidence tumbled in April, a sign that tax hikes early this year have stolen momentum from the American economy.

Retail sales fell 0.4 percent in March, the Commerce Department said on Friday. That missed analysts' expectations of a flat reading.

The data supports the view that the U.S. economy continues to struggle and hasn't performed as well as analysts believed just a few weeks ago. Many analysts cut their growth forecasts for the first quarter. "The payroll tax increase is hurting," said Ian Shepherdson, an economist at Pantheon Macroeconomic Advisors in White Plains, New York.

At the same time, a separate report showed wholesale prices fell sharply in March due to lower gasoline costs. That will come as a relief to consumers beset by high prices at the pump, and could help the U.S. Federal Reserve maintain its very accommodative monetary policy.

Readings for retail sales have been volatile so far this year, making it difficult to know whether the weakness in March was due to a tax hike that went into effect at the start of the year or to temporary factors related to the weather.

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But in a sign that higher taxes may have bitten more into family budgets than previously thought, sales fell 0.2 percent in March when stripping out cars, gasoline and building materials. This core measure corresponds closely with the consumer spending component of gross domestic product. The government also revised lower past core retail sales figures to show a 0.3 percent gain in February and flat sales in January.

"The miss in retail sales sends concerns about the impact of higher payroll taxes," Omer Esiner, a market analyst at Commonwealth Foreign Exchange. Following the report, Barclays cut its estimate for first quarter growth to a 2.8 percent annual rate from a 3.2 percent rate.

Also weighing on the outlook for first quarter growth, U.S. business inventories rose less than expected in February, data from another Commerce Department report showed.

U.S. stocks declined on the weak retail sales data and as results from major banks failed to impress investors. Prices for U.S. Treasuries rose, while the dollar extended its declines against the yen. Prior reports on retail sales had made consumers look surprisingly resilient despite tax increases that kicked in on January 1. A tax on payrolls climbed for all workers, while income tax rates rose for the nation's most wealthy.

Fiscal policy tightened further in March when the federal government began across-the-board spending cuts known in Washington as the "sequester," part of Washington's efforts to shrink the budget deficit.

SENTIMENT TUMBLES
A separate report suggested the government's belt tightening was damaging consumer sentiment. The Thomson Reuters/University of Michigan's preliminary reading on the overall index of consumer sentiment fell to 72.3 in April, the lowest since July 2012 and below economists' forecasts.

Over the entire year, Washington's austerity drive could subtract about 1.5 percentage points from economic growth this year, according to an estimate by the non-partisan Congressional Budget Office.

"The worry is the full reaction to the expiration of the payroll tax cut and to the sequester budget cuts won't be evident until sometime this quarter," said Cary Leahey, a senior advisor at Decision Economics in New York.

Many economists have also noted the loss of economic momentum in many economic indicators for March could have been due to a warm winter, which may have led companies and consumers to pull forward spending. Indicators from retail sales and hiring to factory manager confidence were much stronger in February, and a chilly March may have then dulled activity.

SUBDUED INFLATION
U.S. producer prices recorded their biggest drop in 10 months in March as the cost of gasoline tumbled, the Labor Department said in a separate report. The seasonally adjusted producer price index fell 0.6 percent last month. Economists polled by Reuters had expected prices received by the nation's farms, factories and refineries to fall only 0.2 percent.

In the 12 months through March, wholesale prices were up 1.1 percent, the smallest rise since July. Prices had increased 1.7 percent in February.

The benign inflation environment could strengthen the argument for the Fed to keep monetary policy loose as it tries to steer the economy towards faster growth, despite divisions among policymakers over continued asset purchases.

Minutes of the Fed's March 19-20 meeting released on Wednesday showed the U.S. central bank was moving closer to ending its monthly $85 billion purchases of mortgage and Treasury bonds to keep rates low and spur faster job growth.

Additional reporting by Lucia Mutikani in Washington; and by Nick Olivari, Ellen Freilich and Steven C. Johnson in New York.