Retail Sales Fell in July Despite Clunkers Program

By JEFF BATER and SARAH N. LYNCH

WASHINGTON -- U.S. retail sales unexpectedly fell in July despite the debut of the government's "cash for clunkers" program meant to jump-start the auto business and help turn around the economy.

Separately, U.S. businesses let inventories tumble again in June and got solid help from a surge in sales that cleared away some of the excess supply built up during the long recession.

Retail sales last month dropped 0.1%, the Commerce Department said Thursday.

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The dip was a huge disappointment on Wall Street. Vouchers for the car rebate program weren't available until the last part of July; perhaps the program will have a more positive effect on overall retail sales for August.

Demand for goods aside from cars took a large tumble last month, with big declines for housing-related retailers and electronic stores.

Excluding autos, all other retail sales dropped 0.6%; economists expected a 0.1% gain.

Economists surveyed by Dow Jones Newswires forecast a 0.8% increase in July retail sales. June sales rose 0.8%, revised up from an originally reported 0.6% increase.

Consumer spending makes up 70% of gross domestic product, which is the broad measure of U.S. economic activity. The recession has cost 6.7 million jobs. Household debt is high and net worths have shrunk. People are cutting spending and paying bills. In the second quarter, their spending surprisingly fell, an omen for the expected recovery of the economy.

Evidence suggests the economy stopped contracting in the second quarter and will resume rising, bringing an end to the recession. The latest of a monthly survey of more than 50 business economists sees growth in the second half of this year and in 2010. The Blue Chip Economic Indicators report predicted GDP would grow at an annual rate of 2.2% in the current, third quarter and 2.3% in the fourth quarter, which begins in October.

One thing that can propel the economy this summer is surging federal government spending. Treasury Department numbers Wednesday showed the U.S. ran a budget deficit a 10th straight time in July. "Cash for clunkers" has been credited for driving car sales. The retail report Thursday showed auto and parts sales in July increased by 2.4%, after rising by 1.9% in June.

The federal scrappage program is meant to spur Americans to trade in their gas guzzlers for more fuel-efficient vehicles. Vouchers were available starting July 24. Its purpose is stimulating the economy by boosting car sales and jump-starting an industry seriously damaged by the recession. Two-thirds of the Big Three carmakers is in bankruptcy proceedings, General Motors and Chrysler. Through early Tuesday, dealers had requested reimbursement for 292,447 vouchers issued under the clunkers program totaling about $1.23 billion.

The retail data Thursday said July filling station sales fell 2.1%. Excluding gasoline sales, other retailers' sales increased 0.1%.

Retail sales excluding autos and gas decreased 0.4% in July, the fifth drop in a row.

Furniture retailers fell 0.9% and building material and garden supplies dealers were dropped 2.1%.

Food and beverage stores declined 0.3%. Electronic and appliance stores were down 1.4%

General merchandise stores tumbled 0.8%. Sporting goods, hobby, book and music stores fell 1.9%.

There were some increases: Health and personal care stores, up 0.7%; restaurants and bars, up 0.4%; clothing stores, up 0.6%; and mail order and Internet retailers, up 0.1%.

Jobless Claims Increase Slightly

Initial claims for jobless benefits rose by 4,000 to 558,000 on a seasonally adjusted basis in the week ending Aug. 8, the Labor Department said in its weekly report Thursday. The four-week average of new claims, which aims to smooth volatility in the data, rose by 8,500 to 565,000 -- the highest since July 18.

The tally of continuing claims -- those drawn by workers for more than one week -- fell by 141,000 during the week ended August 1 to 6,202,000 -- the lowest level since April 11.

Economists surveyed by Dow Jones had predicted a decrease in initial claims of 5,000.

Still, despite the increase in this latest data for initial claims, some economists are not likely to be troubled by it.

Abiel Reinhart, an economist with J.P. Morgan Chase & Co. who actually had predicted claims might increase slightly for the week ending August 8, said in an interview Wednesday that the increases would not have "anything to do with our belief on the fundamentals of the labor market."

A small increase in claims may occur, he predicted, because "sometimes when you have large swings in one direction in the claims series, you sometimes get a little bit of a reversal the next week."

He added that despite any increases, he still has seen some other positive developments in the labor market and expects claims to trend downward in the coming weeks.

Thursday's latest jobless cliams figures came about a week after the July employment report showed some improvements, including the smallest payroll drop since last August and the first decline in the unemployment rate since April 2008.

At the same time, the unemployment rate for July was 9.4%, suggesting a tough road still lies ahead.

The Labor Department said Thursday the unemployment rate for workers with unemployment insurance fell by 0.1% for the week ending August 1.

Business Inventories Drop

Inventories decreased 1.1% from the prior month to a seasonally adjusted $1.350 trillion, the Commerce Department said Thursday.

Business sales soared by 0.9% to $975.8 billion in June. Sales in May were flat, revised from an originally reported 0.1% dip.

The sales increase added to evidence the recession, in midyear, is at an end or nearing one. Higher demand will help clear away unwanted supply. Eventually, companies will have to restock shelves, boosting production and economic growth.

May inventories tumbled 1.2%; originally, May inventories were seen down 1.0%.

Economists surveyed by Dow Jones Newswires forecast a 0.8% drop in June inventories.

The inventory-to-sales ratio slipped in June, to 1.38 from 1.41 during May. The gauge indicates how well firms are matching supply with demand by measuring how long, in months, a firm could sell all current inventory. Economists refer to it when trying to assess whether firms are burdened with unsold goods.

A year earlier, the I/S ratio was 1.26. June's level of 1.38 indicates the level of stockpiles remains elevated and that more inventory liquidation is to come in the latter part of this year, though unlikely at the rates during the first half of 2009.

Year over year, inventories were down by 9.8% since June 2008; sales were 18.0% lower.

June 2009 manufacturing sector stockpiles of goods decreased 0.8% from the prior month, after falling 0.8% in May. U.S. wholesalers' inventories tumbled 1.7%, after decreasing in May by 1.2%.

Retailers' stocks of goods decreased by 1.0%, after falling 1.7% in May. Auto dealer inventories fell 2.8%. Excluding the auto component, other retail stocks fell 0.3% in June after sliding 0.7% in May. June inventories decreased by 0.4% at clothing stores; 2.2% at building materials, garden equipment and supplies stores; 0.2% at furniture stores; and 0.5% at food and beverage stores. Inventories increased by 0.8% at general merchandise stores.