By Lucia Mutikani
WASHINGTON (Reuters) - U.S. retail sales rebounded strongly in June as Americans spent more on gasoline and other goods amid soaring inflation, which could allay fears of an imminent recession but not change the view that economic growth in the second quarter was tepid.
The economic picture is, however, becoming increasingly muddled. Manufacturing production slumped for a second straight month in June, other data showed on Friday, implying softening demand as the Federal Reserve aggressively tightens monetary policy to bring inflation down to its 2% target.
The retail sales data followed on the heels of news this week that annual consumer prices surged last month by the most since late 1981. The economy also continued to create jobs at a brisk clip in June. The reports cemented expectations that the U.S. central bank will deliver another 75-basis-point interest rate hike this month.
"Padded by high savings and rising wages, American households are spending nearly as much money as they did earlier, but largely to keep up with higher prices, not to actually buy more stuff," said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. "That said, today's report may cool talk of a near-term recession."
Retail sales rose 1.0% last month, the Commerce Department said. Data for May was revised up to show sales falling 0.1% instead of 0.3% as previously reported. Retail sales increased 8.4% on a year-on-year basis and are 18% above their pre-pandemic trend.
Economists polled by Reuters had forecast retail sales would increase 0.8%, with estimates ranging from as low as a 0.2% drop to as high as a 2.2% increase. Retail sales are mostly made up of goods, and are not adjusted for inflation. The Fed has hiked its policy rate by 150 basis points since March.
The nearly broad increase in retail sales last month was led by receipts at auto dealerships, which rebounded 0.8% after declining 3.0% in May amid shortages. Sales at service stations increased 3.6%. Gasoline prices surged in June, averaging above $5 per gallon, according to data from motorist advocacy group AAA. Prices at the pump have since declined from last month's record peaks and were averaging $4.577 per gallon on Friday.
GRAPHIC: U.S. retail sales https://graphics.reuters.com/USA-STOCKS/gdpzylmlzvw/retailsales.png
Receipts at bars and restaurants, the only services category in the retail sales report, increased 1.0%. There were strong gains in sales at furniture and electronics and appliance retailers. Receipts at sporting goods, hobby, musical instrument and book stores also rose. Online store sales rebounded 2.2%.
But sales at building material, garden equipment and supplies stores fell as did those at clothing retailers.
Despite the strength in retail sales, manufacturing is losing steam. A separate report from the Fed showed factory production fell 0.5% last month, matching the drop in May. That reflected declines in the output of long-lasting manufactured goods and nondurable consumer goods, and helped to push overall industrial production down 0.2%.
GRAPHIC: Industrial output https://graphics.reuters.com/USA-STOCKS/zdpxobxbzvx/indprod.png
Industrial production is one of the several indicators tracked by the National Bureau of Economic Research, the official arbiter of recessions in the United States.
"It isn't often that industrial production gets the recession call wrong, although there was a considerable drop in factory output from late 2014 to early 2016, which was blamed on the oil price crash, and the manufacturing recession didn't spread to the broader economy," said Christopher Rupkey, chief economist at FWDBONDS in New York.
There was, however, encouraging news on inflation. Import prices rose moderately in June, with the cost of goods excluding petroleum products declining 0.5%, a third report from the Labor Department showed. A strong dollar, which has been boosted by rising U.S. interest rates, is curbing imported inflation pressures.
Consumers tempered their inflation expectations in July, a fourth report from the University of Michigan showed. The inflation reports led markets to dial back their expectations for a full-percentage-point rate hike at the Fed's July 26-27 policy meeting.
GRAPHIC: Consumers temper longer-term inflation outlook https://graphics.reuters.com/USA-FED/INFLATION/lbvgnelkbpq/chart_eikon.jpg
Stocks on Wall Street were trading higher. The dollar fell against a basket of currencies. U.S. Treasury prices rose.
Excluding automobiles, gasoline, building materials and food services, retail sales rose 0.8% in June. Data for May was revised lower to show these so-called core retail sales falling 0.3% instead of being unchanged as previously reported.
Core retail sales correspond most closely with the consumer spending component of gross domestic product. Despite June's rise, inflation-adjusted core retail sales were softer, implying consumer spending slowed or even slipped last quarter. But with spending shifting back to services from goods, most economists expect moderate growth in spending rather than a contraction.
Second-quarter GDP estimates range from as low as a 1.9% annualized rate of decline to as high as a 1.0% pace of growth. The economy contracted at a 1.6% rate in the first quarter because of a record trade deficit.
With the labor market generating jobs at a brisk clip and 11.3 million unfilled positions at the end of May, a second straight quarterly decline in GDP would not necessarily mean the economy was in recession. Excess inventories would probably account for much of any decline in GDP last quarter.
A fifth report from the Commerce Department showed business inventories increased 1.4% in May..
"We anticipate the economy will experience a recession toward year-end," said Greg Daco, chief economist at EY-Parthenon in New York.
(Reporting by Lucia Mutikani; Editing by Nick Zieminski and Paul Simao)