Retail sales post gain for third straight month; consumer inflation remains tame

Better days here? Economic rebound gains strength

WASHINGTON — Shoppers and businesses are feeling better about the recovery.

That was the encouraging message from a trio of economic reports Wednesday — and from Federal Reserve Chairman Ben Bernanke, who told lawmakers that the country’s modest rebound is sustainable.

Retail spending rose sharply in March. Consumer inflation remained all but invisible. And businesses boosted their stockpiles in anticipation of higher shopper demand.

The improving economy also lifted first-quarter earnings at JPMorgan Chase & Co. That was the latest sign that the biggest banks are gradually putting the financial crisis behind them.

Bernanke spoke on the same day that the Fed reported the recovery is spreading to most parts of the country. Merchants are enjoying better sales and factories are boosting production, but companies are still wary of ramping up hiring, the Fed reported. But Bernanke also told Congress that the recovery is not strong enough to shrink the unemployment rate much.

Some economists were surprised by the retail sales gains, especially in light of the current 9.7 percent unemployment rate.

“Unemployment rates may be high, consumer confidence may be low and job and income gains may be minimal, but that doesn’t seem to be stopping people from shopping,” said Joel Naroff, chief economist at Naroff Economic Advisors.

Naroff and others question whether the spending gain can be sustained.

“We still fear it won’t be,” Paul Ashworth, a senior economist at Capital Economics, wrote in a research note. “High unemployment, weak income growth, low confidence, tight credit conditions and the need for debt (reduction) all point to restrained consumption growth over the next couple of years.”

Still, better weather and auto incentives brought shoppers out in force last month. It was the latest evidence of a gradually strengthening recovery. Sales surged 1.6 percent, the Commerce Department said, up from February’s revised 0.5 percent gain. That was better than most economists had predicted.

Increases were posted across the board. Car dealers, home furnishing stores, building suppliers, sporting goods stores, clothing retailers and general merchandise stores all reported gains. Auto sales surged the most since October.

Separately, the government said consumer prices inched up just 0.1 percent in March. And excluding food and energy, prices were unchanged in March. Over the past 12 months, those prices have risen at the slowest pace in six years. Still, households remain under pressure as hourly earnings fell again last month.

Businesses also boosted their stockpiles for the second straight month in February. That’s a sign that they expect consumers to keep spending.

Factories, retailers and wholesalers had slashed inventories during the recession as sales plummeted. Sustained gains in sales may persuade businesses to continue rebuilding their stockpiles. That would stimulate factory production and support the economic recovery.

The recovery has begun to benefit the largest banks, such as JPMorgan. It reported Wednesday a $3.3 billion first-quarter profit on solid gains in the financial markets. Its report also signaled some good news on the economy: The dollar amount of its loans in or near default fell.

The positive news lifted spirits on Wall Street. The Dow Jones industrial average finished up nearly 1 percent, and other major stock indexes surged even more.

Economists closely watch retail sales for signs that consumer spending, which fuels about 70 percent of the economy, is recovering. Shoppers cut back sharply and boosted their savings during the Great Recession. Some appear to be spending more freely now.

“Consumers are coming out of their shells despite a very weak labor market,” said Zach Pandl, an economist at Nomura Securities. They have “emerged from the financial crisis with fewer scars than we had feared.”

Pandl estimates consumer spending rose by as much as 4 percent in the January-to-March quarter. That would more than double the 1.6 percent rise in last year’s fourth quarter. And it would amount to the biggest quarterly gain in three years.

The gain comes largely from reduced saving. Disposable income dipped in the first quarter, according to Nigel Gault, chief U.S. economist at IHS Global Insight.

Consumers’ willingness to spend more despite scant pay increases means they are likely “looking ahead to better times,” Gault said.

In part, that’s because companies in March added the most workers to their payrolls in three years. Gault expects incomes to rise in future months as hiring improves.

Last week, chain retailers reported strong sales gains in March. Discounter Target Corp., department store Macy’s Inc., clothier Gap Inc. and Victoria’s Secret parent Limited Brands Inc. posted double-digit increases. Overall, sales in stores open at least a year rose 9 percent last month, based on an index of retailers compiled by the International Council of Shopping Centers.

Automakers have shown strength, too. They reported that sales leapt 24 percent in March compared with a year earlier. Car companies sought to match incentives provided by Toyota Motor Corp. Toyota’s sales jumped 41 percent. General Motors Corp. said new-car sales rose 21 percent. Ford said they rose nearly 40 percent.

April is likely to be slower as the impact of those auto promotions fades, said Jessica Caldwell, analyst at the automotive Web site Edmunds.com. In addition, April lacks any major holiday sales weekends.

“The incentive messages started to get old, so not as many people are out there getting deals,” Caldwell said.

In his testimony Wednesday to Congress, Bernanke issued a cautionary note about the improving economy. He urged lawmakers and the White House to produce a plan to reduce record-high budget deficits. The deficits are unavoidable now, given the damage from the recession, Bernanke said. But he warned that the red ink ultimately poses risks to long-term U.S. economic health.

Paring the deficit could aid the economy by lowering longer-term interest rates and raising consumer and business confidence, Bernanke told the Joint Economic Committee.

For now, the Fed’s survey of the economy is signaling optimism. It said 11 of the 12 Fed regions reported economic activity rose modestly.

That was an improvement from its last survey, when nine regions said so. Snowstorms had crimped activity along the East Coast. In the new survey, only the St. Louis region said economic conditions had “softened.”

The Fed survey matched the other positive news Wednesday.

“Today’s data reinforces the notion that consumers are increasingly participating in the economic recovery,” said Guy LeBas, a strategist at Janney Montgomery.

AP Auto Writer Dan Strumpf in New York contributed to this report.