Retail sales snap back - and then some

NEW YORK (CNNMoney.com) -- Retail sales snapped back with surprising strength in May from a weak April, the government said Wednesday, news that could ease growing worries about a possible consumer spending slowdown in the months ahead.

The Commerce Department said sales jumped 1.4 percent in May, boosted in part by higher gasoline prices, after falling 0.2 percent in April.

It was the biggest increase since January 2006 when sales jumped 3.3 percent. Economists surveyed by Briefing.com had forecast a rise of 0.6 percent.

Excluding autos and auto parts, which can be volatile from month to month, sales also rose a much better-than-expected 1.3 percent in May after a flat April. Economists had forecast a 0.7 percent increase, according to Briefing.com.

"March was strong because of an early Easter. April was weak because of higher gas prices. So May was the decisive month to see which way consumers would go," said Stuart Hoffman, chief economist with PNC Financial Services Group. "The winner in May was the consumer and the economy."

"Consumer spending improved despite the gas price run-up. For now, neither gas nor housing woes can deter Americans from shopping," Hoffman said.

"It's reassuring that after a period of sluggish sales growth consumer spending has bounced back, and convincingly so," said Michael Niemira, chief economist with the International Council of Shopping Centers.

That's important because consumer spending fuels more than two-thirds of the nation's economic activity.

"Despite the pressures of higher gas prices and housing softness, the consumer still has momentum," Niemira added. "I do think May was a catch-up month from the sales softness in April and the numbers reflect the pent-up demand."

Early summer promotions and better merchandise also helped retailers ring up the registers last month. Many retailers, jittery after they suffered disastrous sales in April, set steep discounts over the Memorial Day weekend.

Department stores such as J.C. Penney (Charts, Fortune 500), Sears (Charts, Fortune 500) and Macy's (Charts) cut prices by 40 to 50 percent across categories including clothing and home products. Wal-Mart (Charts, Fortune 500)'s discounts couldn't rev up its sales as its low-income shoppers succumbed to gas price pains last month.

But other merchants, including high-end seller Nordstrom (Charts, Fortune 500) and teen specialty clothing chains Pacific Sunwear posted solid May sales at their stores open at least a year - a key measure of retail performance known as same-store sales - by winning over shoppers with trendy, high-quality products.

Retail sales got a boost from higher gasoline prices since gas stations are included in the numbers. But even excluding both gasoline and auto purchases, sales still rose an impressive 1 percent in May.

All retail categories saw sales increases in May. Gasoline station sales led the gains with a 3.8 percent increase, reflecting the run-up in gas prices.

Elsewhere, warmer temperatures boosted warm weather clothing sales 2.7 percent. Sales of sporting goods jumped 1.8 percent, electronics sales rose 1.3 percent, department stores logged a 1.3 percent gain and food and beverage sales edged up 0.3 percent.

Despite their confidence in last month's sales recovery, both Hoffman and Niemira expect to see more somber results in June.

"Gas prices have retreated but are still over $3. Consumer confidence has leveled off. I think the [sales] momentum will wane a bit in June. We're not going to see double-digit gains," Hoffman said.

"One month's performance doesn't change the broader trend. It only changes perception," said Niemira. "Our data shows June sales are mixed so far."

What's more, some economists fear the surge in bond rates could also trip consumers' ability to spend later in the year.

"All it would take is for the 10-year Treasury yield to continue to rise, for the Fed to raise the overnight rate, and debt used to fund personal spending would take a bigger downturn. This would take out another source of liquidity to retail spending [to negatively impact spending and shopping]," Richard Hastings, senior retail analyst with Bernard Sands, wrote in a note last week.

But Hoffman isn't too convinced.

"Consumer spending is not too influenced by bond rates. It's much more of an indirect impact," he said. "It will hurt the housing market in time as well as stock market investors. But I think the average individual doesn't even know that the bond market prices have been in a swan dive."

"As long as jobs and incomes are growing, people will spend money in stores. Despite all the other ills in the market, here's a consumer and an economy that's showing a very impressive rebound in the second quarter," Hoffman said.

"The fear that the housing downturn could derail consumers is still a risk. It's not a reality, yet," he added.