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U.S. Economy: Retail Sales Fall by Most Since February 2003

Wed Jul 14, 2004

July 14 (Bloomberg) -- U.S. retail sales fell 1.1 percent in June, the biggest decline since February of last year, underscoring forecasts that consumer spending slowed in the second quarter from the previous three months.

The decline reflected a drop in spending at automobile dealerships and department stores and followed a revised 1.4 percent increase in May, the Commerce Department said in Washington. Economists had forecast a 0.8 percent decline.

Gasoline prices, which held above $2 a gallon on average in May and June, limited sales at Wal-Mart Stores Inc. at the same time that autos sold at the slowest annual rate in six years. Job growth and the related income gains are needed to boost spending, which accounts for two-thirds of the economy, economists said.

``We look for June's retail sales drop to be a small bump in the road,'' said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut, and who correctly forecast the June decline. ``As long as employment growth remain vigorous, income gains should be sufficient to support robust spending.''

A separate Labor Department report showed import prices fell 0.2 percent in June, the first decline in nine months, on lower costs for petroleum, food and industrial supplies. Excluding energy, the index of import prices was unchanged.

Retail sales excluding vehicles and parts fell 0.2 percent after rising 0.9 percent a month earlier.


Economists had expected all retail sales to fall after May's previously reported 1.2 percent rise, based on the median forecast of 72 estimates in a Bloomberg News survey. Sales excluding automobiles were forecast to rise 0.2 percent.

The 4 3/4 percent Treasury note fell 3/32 point after the reports, pushing up the yield 1 basis point to 4.48 percent at 10:13 a.m. New York time.

Consumer spending is forecast to slow to a 3.2 percent annual rate in the second quarter from a 3.8 percent pace in the prior three months, based on the median estimate in a separate Bloomberg poll from June 26 to July 6. Third-quarter spending may accelerate to a 3.5 percent rate, the survey found, as hiring and incomes rebound.

``There's been a lot of discussion that the boom is over,'' Cary Turner, chief financial officer at Pier 1 Imports Inc., said yesterday at a conference in Boston. ``But we feel there is still a trend that people want to buy for the home and that people want to own a home.'' Turner said the largest U.S. retailer of imported home furnishings and accessories plans to open more stores because demand is increasing.

Oakley Inc., a maker of sunglasses, this week cut its earnings forecast for 2004 after demand for its products waned. Other companies also said demand remains strong. Harley-Davidson Inc., the largest U.S. motorcycle maker, said today its profit rose 22 percent in the second quarter on increased sales.

Auto Sales

Sales at automobile dealerships and parts stores dropped 4.3 percent last month, the biggest decline since February 2003, after rising 3.2 percent. Vehicle purchases slowed to a 15.4 million annual rate in June from 17.8 million in May, according to industry figures earlier this month. That was the slowest since August 1998, as incentives at General Motors Corp. and Ford Motor Co. lured fewer buyers.

Receipts at service stations dropped 0.9 percent last month, the biggest decrease since October 2003, following a rise of 5 percent in May.

Retailers including Bentonville, Arkansas-based Wal-Mart and J.C. Penney Co., based in Plano, Texas, said gasoline prices that rose by a third from a year earlier left consumers with less to spend in June on clothes and other items.

Department Stores

Sales at general merchandise stores, which include department stores, fell 0.2 percent last month after rising 1.1 percent in May. Department stores sold 0.8 percent less merchandise last month. Sales at clothing and accessory stores declined 0.5 percent after rising 1.4 percent.

Sales rose 0.5 percent at electronics and appliance stores, 1.1 percent at furniture stores, and 0.6 percent at sporting goods, hobby, book and music outlets rose 0.6 percent. Sales at building material and garden supply stores rose 0.1 percent.

Sales fell 0.1 percent at food and beverage stores and 0.8 percent at restaurants and drinking establishments.

Purchases excluding autos and building materials, the category used in the Commerce Department's calculation of personal consumption in its report on gross domestic product, fell 0.2 percent following rising 1.1 percent in May.

Gasoline Costs

Excluding cars and gasoline, sales declined 0.1 percent last month following a rise of 0.4 percent.

The average retail price of gasoline held above $2 a gallon for a second straight month in June, according to Department of Energy figures. The average retail price of all grades of gasoline rose to a record $2.10 a gallon on May 24.

Higher energy prices prompted economists to reduce estimates for growth in the second quarter to an annual rate of 4.1 percent, down from a previous forecast of 4.5 percent, according to the median estimate in the latest monthly survey by Bloomberg News. Economists surveyed expect growth of 4.5 percent this year, the fastest since 1999.


Job gains will average more than 200,000 a month in the third quarter, helped by increased demand as companies step up production to rebuild depleted inventories, said Lynn Reaser, chief economist at Banc of America Capital Management in St. Louis. Payrolls increased by 112,000 in June, the latest Labor Department figures show.

Target Corp., the second-largest U.S. discount chain, said July sales are rising more than the 1 percent to 2 percent gain it has forecast. The Minneapolis-based retailer attributed the rise to purchases for the July Fourth holiday and demand for garden equipment, entertainment, toys and automotive items.

Fort Worth, Texas-based Pier 1, which has about 1,000 stores in North America, the U.K. and Mexico, expects to boost this number to 1,500 stores within the next few years, Turner said. The company's June sales at stores open at least a year fell 4.3 percent, less than the company's forecast of a 7 percent to 9 percent decrease.


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