Retail Sales Dip for First Time Since August 1998

Updated from 9:56 a.m. EDT

Retail sales in the U.S. slumped slightly in April for the first time since August 1998, as a slow start to spring in many parts of the nation kept shoppers waiting for better weather to purchase their warm weather goods.

Retail sales fell 0.2% overall in April, following March sales that were upwardly revised to 0.5% from an early 0.2% reading, the Commerce Department said Thursday. Excluding automobiles, retail sales were unchanged. The dip in sales surprised economists, who had been looking for retail sales to rise 0.4%, and 0.3% excluding autos.

While overall sales still remain at strong levels, the decline in April is likely to ease the minds of economists and policy makers, who fear that overzealous consumer spending is sowing the seeds of inflation. Sales have risen at a dizzying pace recently despite steadily rising interest rates, which in theory should have slowed consumer demand.

The sharp upward revision in March sales and the still-solid level of sales in April is not likely to deter Federal Reserve policy makers from continuing to raising short-term interest rates when they meet next on May 16. The Fed has raised rates five times in 0.25 percentage point increments since last June, and many economists expect them to up the magnitude of their next hike to 0.50 percentage point.

Stocks rallied following the sales data, in part because slower sales may mean less of a chance that the Fed will actually move by 0.50 percentage point. By midday, the Dow Jones Industrial Average was up about 131 points, while the Nasdaq Composite Index was up 75.

But most economists who are anticipating a bigger rate move stuck to their forecast, keeping bond prices largely unchanged.

Fed officials have repeatedly warned that heavy consumer demand for goods and services is outstripping domestically-produced supply, which could lead to inflation as more dollars chase fewer goods. Cheap imports have helped to fill the gap and offset inflationary pressures, but import prices have been on the rise. The Labor Department said Thursday that on an annual basis, import prices were up 6.3% in April, although declining oil prices inspired a month-to-month drop of 1.6%.

The softness in April sales might be among the first signs that higher interest rates, with help from an early-April drop in technology stocks, might be starting to have a chilling effect on American consumers. But many economists may not be convinced yet that the April decline is an interest-rate inspired slowdown, or just a temporary pause, until they see further signs of slower retail activity.

"This hints that retail sales in the second quarter will be softer," said Ed McKelvey, senior economist at Goldman Sachs. "But it's not, by any means, a conclusive sign that interest rates have slowed consumers."

McKelvey pointed to several temporary factors that suppressed overall sales in April, including the cooler-than-usual weather in most of the country. Other factors included a 2.3% drop in gasoline sales due largely to price fluctuations, and a 1.6% decline in building materials after the unusually warm winter kept construction activity high, compared to most years when construction projects surge in April.

If April's slowdown is indeed the beginning of a trend, some retailers may find themselves in a troubling situation. A number of retailers have been struggling with shrinking profits, even in the first quarter, when retail sales were vigorous.

Another economic indicator Thursday that tracks the number of Americans filing for first-time unemployment claims fell 7,000 to 297,000, an indication that the booming labor market continues to keep Americans employed.