U.S. retail sales point to underlying strength

By Lucia Mutikani and Jason Lange

February 14, 2012 2:49 PM EST

U.S. retail sales picked up last month after a sluggish December, providing a firm foundation for the economy's recovery.

Sales rose 0.4 percent in January after being flat the prior month, the Commerce Department said on Tuesday.

The January reading was weaker than economists had expected because auto dealers took in less cash. Excluding autos, sales rebounded a solid 0.7 percent, the biggest gain in 10 months.

"The consumer is spending and there is certainly no sign of a recessionary downturn, but spending patterns reflect a deleveraging consumer weighted by weak growth and a higher cost of living," said Steve Blitz, chief economist at ITG Investment Research in New York.

So-called "core" retail sales, which go into the calculation of U.S. gross domestic product, rose 0.7 percent after declining 0.4 percent in December. Core sales strip out autos, gasoline and building materials.

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Investors on Wall Street took a dim view of the report and the Standard & Poor's 500 index <.SPX> retreated from a near seven-month high. Prices for U.S. Treasury debt rose and the dollar rose against a basket of currencies.

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Graphic on retail sales - http://link.reuters.com/guc66s

Graphic on import prices - http://link.reuters.com/muc66s

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GASOLINE PRICES RISING

While the economy is expected to take a step-back in the first half of the year, a firming labour market and solid manufacturing are seen providing a cushion.

Automakers reported the strongest sales in nearly 2-1/2 years in January, but that was supported by discounts and strong fleet sales. The government, which measures retail sales in dollars, counts fleet sales as a business capital expenditure, not retail activity.

Other data on Tuesday showed confidence among small U.S. business owners rose for a fifth straight month in January.

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