Tax Checks Spent at Malls

Retail sales continued to rise in July as tax cuts kicked in, helping consumers go shopping for cars, electronics and other goods.

Sales rose 1.4% to $317 billion, the fastest clip in four months, the Commerce Department said Wednesday. The increase came on the heels of a revised 0.9% rise in June and beat economists' consensus estimate of a 1% rise.

Excluding automobiles, sales grew 0.8% last month, following a revised 1% gain, also above forecasts of a 0.6% rise.

"It was a strong report and is an omen of better times ahead," said Mike Niemira, vice president and senior economist at Bank of Tokyo-Mitsubishi. "There was more tax money flowing back to the consumer, with the tax credit and lower tax rate. Based on this, I'm upbeat going forward."

Consumer incomes rose in July with the start of the government's plan to cut $330 billion in taxes, helping boost discretionary spending.

But Niemira also sounded a cautious note: "I don't think we ought to extrapolate the pace. Consumer and business spending have been choppy, and this trend will continue because of the volatility in auto sales."

The rise in retail sales was heightened by a 3.2% gain in auto purchases in July, the strongest since March. Vehicle sales hit a 17.3 million annualized pace last month, the highest level so far this year. Meanwhile, sales at general-goods stores rose 1.1% in July, and at clothing stores, 0.8%.

The benchmark 10-year Treasury note fell after the release of the report, pushing the yield up to 4.53% on expectations U.S. economic growth is starting to perk up.

Confirming the strength in consumer spending, Wal-Mart(WMT) beat Wall Street's estimates for the second quarter and increased full-year earnings projections. Meanwhile, jewelry and luxury goods seller Tiffany(TIF) also topped analysts' estimates with a strong increase in quarterly earnings and reaffirmed its full-year profit forecast. But May Department Stores(MAY) on Tuesday reported a loss in the second quarter, reversing the profit from the year-ago period. Shares of Wal-Mart were losing 38 cents, or 0.7%, to $58.42; Tiffany's was gaining $1.02, or 2.8%, to $37.30; and May shares were up 64 cents, or 2.4%, at $27.01.

Consumer spending, which accounts for more than two-thirds of the economy, rose at a 3.3% annual rate in the second quarter, helping the economy grow at a 2.4% pace.

Niemira, who expects GDP to grow by 3.5% in the third quarter, noted that shoppers were unfazed by uncertainty in the job market, with "consumption being stronger than what would be directly implied by employment.

"There are many factors still propping up spending, such as the tax cuts, and more strength will be seen as the underlying employment conditions improve," he said.

Unemployment fell to 6.2% in July, after reaching a 6.4% high the previous month, while weekly jobless claims have remained below the critical 400,000 level for three consecutive weeks.

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