Retail sales surprise experts

Retail sales posted a better-than-expected increase in January, a welcome development that could mean stronger economic growth in coming months.

The Commerce Department said Friday that retail sales increased by 0.5 percent last month, the best showing since November and better than the 0.3 percent increase economists had expected.

Excluding autos, sales posted a 0.6 percent reading, also better than expected, with strength coming from a surge at general merchandise stores, a category that includes big national chains such as those owned by Wal-Mart Stores Inc.

Strength in consumer spending is important because it accounts for 70 percent of economic activity. Economists are worried that the spending gains since last summer could falter given the tough times facing many U.S. households and that weakness could derail the fledgling recovery.

Economists said that the slightly stronger sales performance in January was a good sign but they still worried that activity could slump in coming months given all the problems facing households.

"We expect that lingering high unemployment, weak income growth, low confidence, tight credit conditions and the continuing need to deleverage will constrain consumption growth for at least this year and possibly well beyond," said Paul Ashworth, senior U.S. economist at Capital Economics.

In a second report, the Commerce Department said that businesses reduced their inventories by 0.2 percent in December, a weaker performance than the 0.2 percent rise that economists had expected.

Total business sales rose by 0.9 percent in December following an even stronger 2.4 percent gain in November but the dip in inventories showed that businesses remain cautious about the strength and durability of the recovery.

The overall economy grew at an annual rate of 5.7 percent in the October-December period, the best showing in six years, but the concern is that this growth could slow considerably in coming months as the impact of the government's stimulus programs begins to fade and unemployment remains stubbornly high.

In its annual economic report to Congress, the Obama administration on Thursday forecast that the economy would average 95,900 new jobs per month this year, not enough to make a significant dent in an unemployment rate that now stands at 9.7 percent. The administration's economists also forecast that Americans' personal savings would remain high as credit remains tight, another development likely to weigh on spending.

The 0.5 percent increase in retail sales in January followed a 0.1 percent decline in December, a figure that was revised up from an initial report that sales had fallen 0.3 percent during the month. The latest reading was the best showing since sales had surged by 2 percent in November.

Sales at auto dealerships were flat in January following a 0.1 percent rise in December. Activity last month was hurt by a series of safety recalls at Toyota.

The 0.6 percent increase in retail sales excluding autos followed a 0.2 percent drop in this category in December. The strength in January was led by a 1.5 percent jump in sales at general merchandise stores, the biggest one-month jump in this category since February 2009.