Weak U.S. retail sales, inflation data cloud rate hike outlook

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. retail sales barely rose in September and producer prices recorded their biggest decline in eight months, raising further doubts about whether the Federal Reserve will raise interest rates this year.

The weak reports on Wednesday were the latest suggestion that the economy was losing momentum in the face of slowing global growth, a strong dollar, an inventory correction and lower oil prices that are hampering capital spending in the energy sector. Job growth braked sharply in the past two months.

"The softness of September's figures supports our view that the Fed probably isn't going to hike interest rates until early next year," said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.

The Commerce Department said retail sales edged up 0.1 percent last month largely as cheaper gasoline pushed service station receipts down 3.2 percent. Giving the report a weak tone, sales in August were revised down to show them unchanged instead of rising 0.2 percent.

Retail sales excluding automobiles, gasoline, building materials and food services slipped 0.1 percent last month after a downwardly revised 0.2 percent gain in August.

These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product and were previously said to have advanced 0.4 percent in August.

Last month's weak core sales and the downward revision to August's figure, together with another report from the Commerce Department showing business inventories were again unchanged in August, prompted JPMorgan (N:JPM) to cut its third-quarter GDP estimate by half a percentage point to an annual rate of 1 percent.

The economy grew at a 3.9 percent pace in the second quarter. Some economists, however, cautioned against reading too much into the soft retail sales report, noting discretionary spending remained fairly healthy.

Consumers boosted their purchases of automobiles and furniture and spent more on hobbies, clothing and eating out. That points to underlying strength in domestic demand which should provide some cushion against softening global growth.

CONSUMER SPENDING STILL STRONG

"The overall message is that consumer spending has remained extremely strong. If sentiment had indeed shifted, it would be hard to explain why sales of cars, certainly among the more expensive items, jumped in September to their highest level since July 2005," said Harm Bandholz, chief economist at UniCredit Research in New York.

Sales of electronic goods were soft despite the launch of Apple's (O:AAPL) latest iPhone. Some economists said they expected the boost from the iPhone in October.

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A report from the Fed showed the economy was expanding modestly from mid-August through early October. It described consumer spending as growing "moderately" during the same period and noted the strong dollar was hurting manufacturing.

Stocks on Wall Street fell after Wal-Mart Stores Inc (N:WMT) warned its full-year sales would be flat because of dollar strength. Prices for U.S. Treasury debt rose, while the dollar dropped against a basket of currencies.

In a separate report, the Labor Department said its producer price index fell 0.5 percent in September, the largest drop since January, after being unchanged in August.

In the 12 months through September, the PPI fell 1.1 percent after declining 0.8 percent in August. It was the eighth straight 12-month decrease in the index.

The weak inflation environment is one of the obstacles confronting Fed policymakers who are contemplating raising rates for the first time in nearly a decade. The U.S. central bank has kept its short-term interest rate near zero since late 2008.

"It is the uncertain course of inflation that could keep the Fed from hiking rates this year. Unfortunately, the gang that cannot communicate straight is still sending out as many unclear signals as possible," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.