Jones Lang LaSalle


Retail Sales Surge
2.3%, Underlining
Economy's Health
Data Help Dow Industrials
Jump 1.3% to Top 11000;
Another Rate Increase Likely
By CHRISTOPHER CONKEY
February 15, 2006; Page A1

Consumers went on a postholiday shopping spree in January, a strong sign of economic vigor that increases the likelihood the Federal Reserve will keep raising short-term interest rates.
The Commerce Department said yesterday that retail sales surged a seasonally adjusted 2.3% in January from December, largely because of gift-card redemptions and abnormally mild winter weather. The January jump followed a tepid 0.4% rise in December. January sales were up 8.8% from a year earlier.

Coming after an earlier report that employers added nearly 200,000 jobs in January and pushed the unemployment rate down to 4.7%, the retail-sales report was cheered as evidence that the economy has roared back from a fourth-quarter lull. "It wipes out the weakness we saw in preceding months," said Peter Hooper, chief U.S. economist at Deutsche Bank. "We were expecting the fourth-quarter slowdown was transitory. This confirms that."

Reflecting such optimism, as well as a decline in oil prices, investors sent the Dow Jones Industrial Average surging 136.07 points, or 1.3%, yesterday to close at 11028.39 -- its best one-day gain since late October. (See related article.)

Many economists had anticipated a strong increase in retail sales after the weak showing of December, especially in light of earlier reports of strong auto sales in January, but few expected such robust growth. Even excluding the 2.9% increase in sales of motor vehicles and parts and a 5.5% rise in gasoline-station sales driven by higher pump prices, the remainder of January retail sales -- everything from department stores to bars -- were up 1.8% from December, when such sales rose just 0.3%.

"It was extraordinary," said Rosalind Wells, chief economist at the National Retail Federation, a trade group.

With overall consumer spending so vigorous last month, Peter Kretzmer, senior economist at Bank of America Corp., said he now believes the economy will expand at more than a 5% annual rate in the first quarter, rebounding from the 1.1% growth rate of the fourth quarter of 2005. Based on recent data, many economists now expect the government to revise up the fourth-quarter estimate to around 1.3% when it issues new data on Feb. 28.

After weighing recent indicators showing low unemployment, rising wages, elevated consumer confidence and a healthy manufacturing sector, markets now seem assured the Fed will raise its target for short-term interest rates by another quarter percentage point to 4.75% at its March 27-28 meeting -- the first for new Fed Chairman Ben Bernanke. Mr. Bernanke makes his debut in Congress as Fed chairman today to give testimony on the economy and monetary policy to the House Financial Services Committee.

"We already thought there was going to be another hike in March," Mr. Kretzmer said. "To say that this cements it is probably an understatement."

Ms. Wells of the retail federation and other economists cautioned that two primary drivers of January's sales growth -- balmy weather and gift-card purchases -- will likely evaporate this month, particularly after a blizzard last weekend snowed in consumers throughout the Northeast. Discount chain Target Corp. yesterday said colder weather will hurt February sales and that it now expects sales of stores open more than a year to climb 2.5% to 3.5% in February, down from its previous prediction of 2.5% to 4.5% growth.

The January bounce was "a one-month shot," Ms. Wells said. "We're likely to see weak February sales because of the blizzards in the Northeast, and then generally I think the economy is going to slow as the year goes on."

Many industries posted increases in January. Sales at clothing stores leapt 4.2% from the previous month, while sales at department stores rose 1.6%, and at electronics and appliance dealers, 2%. Sales in all three categories fell in December.

There was good news for housing-related businesses, too. Sales at furniture stores were up 3.7%, after falling 1.1% in December. Sales at building-material and garden-equipment suppliers, an indicator of home-remodeling activity thought to be particularly sensitive to signs of a cool down in the housing market, were up 3.4%, after December's 0.2% decline. The data suggest the slowdown in home-price appreciation has yet to crimp consumer spending and reinforce the view that the housing market is in for a soft landing rather than a broader crash.
Grocery-store sales were flat, though, and sales at Internet, catalog and other "nonstore retailers," as the Commerce Department calls them, fell 2.6% in January, another strong indication that consumers took advantage of January's unusually mild weather to visit brick-and-mortar stores.

Meanwhile, the Commerce Department reported yesterday that business inventories rose 0.7% in December after a 0.6% increase in November. Inventories, however, were outpaced by a 1.2% jump in sales, the largest monthly increase in nearly a year.