U.S. retail sales dip less than expected

WASHINGTON (Reuters) - U.S. retail sales fell modestly last month, a tentative sign that spending could be stabilizing, but a record 5.3 million workers on jobless benefits indicated households remain under pressure.

The U.S. Commerce Department said on Thursday that sales slipped 0.1 percent in February after a hefty 1.8 percent rise a month earlier, an unexpectedly small drop and a rare dose of good news for an economy trapped in a 14-month recession.

Analysts, however, said it was unlikely that U.S. consumers were returning to health just yet.

"It now appears that real consumer spending will be roughly flat in the first quarter. Even though the worst declines appear behind us, it would be premature to conclude that the consumer is on the way back," said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.

U.S. stocks rallied for a third straight day, cheered by the retail data, with the Dow Jones industrial average closing above 7,000 for the first time since late February. A strong 30-year bond auction lifted U.S. Treasury debt prices.

"The consumer is still facing severe head-winds from falling employment and plunging asset values. The pace of (economic) contraction in the first quarter is still going to be similar to the fourth quarter," said Gault.

The economy shrank at a 6.2 percent annual rate in the fourth quarter, its steepest dive since early 1982. A total of 4.4 million jobs have been lost since the start of the recession in December 2007.

A big drop in auto sales helped pull down the retail results. Excluding motor vehicles and parts, sales increased 0.7 percent in February, compared to a 1.6 percent advance the previous month.

Households, buffeted by rising unemployment and plummeting asset values, have largely become penny-pinchers and are shunning big-ticket items such as cars. Figures from the Federal Reserve -- the U.S. central bank -- showed household net worth fell $11.2 trillion in 2008.

Consumer spending, which constitutes over two-thirds of U.S. economic activity, dropped at a 4.3 percent rate in the fourth quarter, the biggest fall since the second quarter of 1980 and a big contributor to the economy's sharp contraction.

BIZARRE READING

February's unexpectedly strong sales, coupled with an upward revision to the January figure, suggested consumers may be showing a bit more life this quarter, but that did not convince analysts a revival was at hand.

"It's quite bizarre that given the decline in employment and the rise in the unemployment rate we would have two months of extremely strong retail activity," said Nick Kalivas, vice president of financial research at MF Global in Chicago.

Gasoline sales climbed 3.4 percent in February as prices rose -- the biggest gain since November 2007 -- after increasing by 2.8 percent in January.

That helped limit the impact of a 4.3 percent plunge in vehicle sales on the headline number. Vehicle sales rose a surprisingly strong 3.1 percent in January.

Sales of building materials dipped 0.2 percent in February after slipping 1.3 percent in the prior month.

Analysts said sales in February were likely supported by continued deep discounts by retailers and cost of living adjustments to checks for Social Security recipients.

"The increase boosted the average size of monthly Social Security checks to about $1,153 from $1,090," said Tony Crescenzi, chief bond market strategist at Miller, Tabak & Co in New York, citing Social Security Administration data.

LABOR MARKET PRESSURE

But with unemployment rising sharply, economists said consumer spending was unlikely to turn robust any time soon.

The number of people drawing state unemployment benefits rose by 193,000 to a record 5.32 million in the week ended February 28, the most recent week for which data is available, the U.S. Labor Department said.

At the same time, new applications for jobless benefits increased to 654,000 last week from 645,000 the week before.

"One of the key statistics that normally correlates well with the ending of an economic downturn is when we start to see initial jobless claims declining. We are not seeing that," said Michael Strauss, chief economist at Commonfund in Wilton, Connecticut.

A separate Commerce Department report showed business inventories fell 1.1 percent in January and sales dropped 1.0 percent, another indication that first-quarter gross domestic product could fall at a similar pace to that seen in the October-December quarter.

That left the inventories-to-sales ratio, which measures how long it would take to empty shelves at the current pace of sales, at 1.43 months' worth, unchanged from the prior month.

"Inventories could subtract as much as 3 percentage points from GDP," said Alan Ruskin, chief international strategist at RBS Greenwich Capital in Greenwich, Connecticut.

"First quarter GDP may end up showing little improvement from the fourth quarter, but this time the traditional lagging indicators will be showing the extreme weakness, which provides a base for less negative numbers into the second half."

(Additional reporting by Alister Bull; Editing by James Dalgleish)