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Retail: Not out of the woods yet

By Annalyn Censky, staff reporter


NEW YORK (CNNMoney.com) -- The road to economic recovery is still rocky, but American consumers are slowly starting to spend again.

Several encouraging signs in the retail sector -- including a strong retail sales report and an improved outlook from a retail bellwether -- show that spending is picking up.

While that may not be enough to lift the economy out of its funk, it could get the recovery back on track, economists say.

"Consumer spending is still two-thirds of the economy, so there's no way we can have a significant turnaround without that moving up," said Eric Beder, managing director of retail and consumer research at Brean Murray, Carret & Co.

As the economy fell into a spending-fueled recession in 2008, Americans began to pull back on nonessential purchases, started to pay off debt and save more. Consumer spending has been stuck in neutral ever since. But this summer has seen some signs of life.

Retail sales, led by back-to-school shopping and a strong showing from grocery stores and gasoline stations, rose 0.4% to $363.7 billion, up from July's 0.3% increase, the Commerce Department said Tuesday.

"August brought a nice solid number. Now let's get a few solid numbers in a row before we say we're out of the woods," Beder said.

Another glimmer of hope for retailers came from top consumer electronics chain Best Buy on Tuesday. The retailier reported a 60% boost in its quarterly profit that crushed analysts' estimates, prompting the company to raise its full-year outlook.

Best Buy (BBY, Fortune 500) credited its strong performance to sales of cell phones, appliances and tablet computers, and said that while the number of customers coming into stores fell, those who came in spent more.

A long road ahead

While spending is picking up, consumers are still holding back and the economy still has a long way to go, said John Canally, an economist with LPL Financial.

"Today's report on retail sales suggests the pessimism that we had in August was overdone," he said. "But it doesn't show we're close to booming either. The economy's chugging along here. It's not a booming economy, but it's also not a double dip."

Indeed, there were a few dark spots in August's retail sales report.

July's increase was downwardly revised from the originally reported 0.4%.

And overall gains were limited by disappointing motor vehicle and parts sales, which declined 0.7% during the month, echoing downbeat auto sales reported two weeks ago. Last month was the worst August for industrywide auto sales in 27 years.

But stripping out the volatile auto component, retail sales rose 0.6% last month, a sign that shoppers are hitting the malls.

While still below 2008 levels, sales were much better than economists had expected. The surprisingly strong increase in August could even be enough to spur some economists to lift their forecasts for third-quarter GDP, Canally said.

August marks the middle of back-to-school shopping -- typically seen as a harbinger of how retailers will fare during the holiday season. Strong data hint that consumers may be more willing to keep their wallets open for Santa this winter.  To top of page

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