Retail sales up, economic recovery seen widening

WASHINGTON (Reuters) - Sales at U.S. retailers rose more vigorously than expected in March as stronger demand led businesses to rebuild inventories to a seven-month high in February, suggesting a broadening economic recovery.

The retail sales report on Wednesday painted a picture of consumer defiance in the face of high unemployment and tight access to credit. It offered hope the manufacturing-led recovery would continue when the boost from government stimulus and the rebuilding of inventories ebbs.

"Self-sustained recovery are the key words we are all looking for right now and today's retail sales report is a step in that direction," said Robert Dye, a senior economist at PNC Financial in Pittsburgh.

U.S. Federal Reserve Chairman Ben Bernanke later told Congress he too thought domestic demand was moving onto firmer footing though he cautioned the recovery was only a moderately paced one.

Total retail sales jumped 1.6 percent, the largest increase since November as consumers stepped up purchases of vehicles and a wide range of goods, the Commerce Department said. January sales were revised up to a 0.5 percent rise from 0.3 percent.

The data provided a fresh catalyst for stock bulls to push the S&P 500 index up through a critical level of 1,200, extending the benchmark index's gain since the March 2009 bottom to 77 percent.

Consumer discretionary stocks, which include retailers and other consumer-oriented companies, were among top gainers.

U.S. government debt prices were marginally lower.

With domestic demand strengthening, businesses have restarted to rebuild inventories from record low levels. Business inventories increased 0.5 percent in February, the largest advance since July 2008, to their highest level in seven months, the Commerce Department said in a second report.

Bernanke said demand was picking up, but he still viewed the recovery from the worst downturn since the Great Depression as moderate. He reiterated the U.S. central bank's commitment to very low interest rates.

"There is a pretty broad view that we are seeing some building momentum in final demand. Consumer spending looks to be picking up," Bernanke told the Joint Economic Committee of Congress on Wednesday.

"It looks like we are on a path to moderate recovery and that risk of a double-dip, while certainly not negligible, is certainly less than what it was a few months ago."

The dollar fell after Bernanke gave no new guidance on U.S. interest rates.

A separate report from the Labor Department showed no signs of inflation pressures, which should help the U.S. central bank honor its pledge to keep its benchmark interest rate unusually low for an extended period.

MUTED INFLATION

Consumer prices rose 0.1 percent last month after being flat in February. Excluding volatile food and energy prices, core inflation was unchanged in March after rising 0.1 percent the prior month.

Growing confidence in the recovery, particularly brightening prospects in the job market, is encouraging households to tap into their savings to fund purchases of goods, including luxury items.

Retail sales in March were buoyed by a 6.7 percent rebound in motor vehicle and parts purchases. Excluding motor vehicles and parts, retail sales rose 0.6 percent in March after rising 1.0 percent the prior month as a combination of an early Easter holiday and warm weather boosted receipts at clothing stores.

"This surge in spending reflects a decline in the saving rate rather than a surge in income," said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.

"Consumers will need income support to sustain the expansion, but with the labor market beginning to turn upwards, help is on the way."

Core retail sales, which correspond most closely with the consumer spending component of the government's gross domestic product report, rose 0.5 percent after increasing 1.2 percent February. Analysts said this bode well for first-quarter gross domestic product growth.

"This implies a strong 4 percent gain in real consumer spending in the first quarter and leaves GDP tracking close to 4.5 percent in the first quarter," said Michelle Meyer, an economist at Barclays Capital in New York.

Consumer spending, which normally accounts for about 70 percent of U.S. economic activity, increased at a 1.6 percent annual rate in the fourth quarter. The economy expanded at a 5.6 percent rate in the last three months of 2009.

Retailers reported growth in sales across a broad spectrum of categories, with the exception of gasoline stations and electronics and appliances stores.

Clothing and clothing accessories sales increased 2.3 percent, while building materials and garden equipment climbed 3.1 percent - the largest advance since November 2007. Receipts at sporting goods, hobby and book stores rose 1.0 percent.

(Additional reporting by Emily Kaiser)