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U.S. Retail Sales Drop in May while Consumer Sentiment Rises in June

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In mixed economic news that pushed the U.S. markets down and brought them back up again, retail sales for May dropped unexpectedly lower for the first time in months while consumer sentiment showed surprising strength once again in early June.

The U.S. Commerce Department reported that retail and food services sales for May decreased 1.2% from April. Though sales are 6.9% higher than a year ago, economists had predicted a rise of about 0.4%, so the dip roiled the markets briefly. Americans last month cut spending by an average of 1.1% on everything from clothing to building materials, and auto sales fell 1.7%.

“The key culprit here is the building materials component, where sales plunged a gigantic 9.3%, following enormous increases totaling 17.1% in the previous two months,” said Ian Shepherdson, chief U.S. economist for High Frequency Economics in Valhalla, N.Y.

“These two months were much weaker than the previous two, when this measure of core activity rose by an average of 1.1% per month,” Shepherdson said. “This strong performance likely reflected a combination of tax refund spending, post-winter storm repair spending and a boost from tax rebates for energy efficiency appliances. With these effects all now gone, the weaker underlying picture is revealed.”

Despite this gloomy outlook for retail sales, U.S. consumers are nevertheless feeling pretty chipper these days, according to the Reuters/University of Michigan index.

U.S. consumer sentiment grew in early June, rising to its highest level since January 2008, with the index showing an increase to 75.5 in June from 73.6 in May. Economists’ consensus was for a rise in the index to 74.

“The May survey data indicate that consumers expect modest declines in the rate of unemployment as well as small increases in inflation and interest rates during the year ahead,” said Richard Curtin, chief economist for Reuters/Michigan Surveys of Consumers, in an analyst note. “Unfortunately, consumers also anticipate a slower pace of recovery and that the gains in employment in the year ahead will be distressingly small. Nonetheless, financial gains among upper income households will continue to foster growth in overall consumer spending, although the pace of spending growth will slow during the balance of the year and into the start of 2011.”

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