March 14, 2006

Retail sales drop, current account gap widens

By Andrea Hopkins

WASHINGTON -- U.S. retail sales fell a larger-than-expected 1.3 percent in February as auto sales plunged and consumers took a breather after spending big in January, a government report showed on Tuesday.

It was the first decline in sales since August and larger than the 0.8 percent drop forecast by Wall Street. But the Commerce Department revised up January sales to a whopping 2.9 percent rise from the originally reported 2.3 percent gain.

Analysts shrugged off February's weakness as an inevitable pullback after unusually warm weather boosted shopping in January, and said consumer spending and economic growth would likely be strong in the first quarter.

"If you put the two months together it still looks as if retail sales were strong at the beginning of the year -- an average increase of 0.8 percent for each of the two months," said Gary Thayer, chief economist at A.G. Edwards & Sons in St. Louis.

A separate report showed the U.S. current account deficit, the broadest measure of U.S. trade with the world, widened more than expected in the fourth quarter to a record $224.9 billion, pushing the 2005 gap to a record $804.9 billion.

The quarterly shortfall in the current account was much larger than Wall Street forecasts for a deficit of $217.7 billion. The Commerce Department revised down the current account deficit in the third quarter to $185.4 billion, from the previously reported $195.8 billion.

While some analysts have said the ballooning current account deficit is unsustainable, others have said it simply reflects the fact that Americans spend more and save less than the rest of the world.

"If the current account deficit and the trade deficit, if that were really a problem it would already have been a problem -- it is just part of the way the world is set up right now," said Robert MacIntosh, chief economist at Eaton Vance Management in Boston.

"We buy the goods that are produced overseas and then they turn around and reinvest into our country's securities and real estate. It is a system that works."

U.S. Treasury debt prices trimmed early gains despite the pullback in retail sales, while the dollar held steady. U.S. stock futures were little changed.


The retail sales report showed demand outside the auto sector was down 0.4 percent in February, in line with analyst expectations, in the largest decline since April 2004.

Sales of motor vehicles and parts dropped 4.6 percent last month, the biggest drop since August 2005, after a 4.2 percent surge in January, the report showed.

Sales of furniture, clothing, electronics and appliances all fell. Gasoline station sales fell 1.6 percent as gas prices eased. Retail sales excluding gasoline were down 1.3 percent in February after being up 2.8 percent in January.

In its report on the current account, which includes both trade in goods and services and investment flows, the Commerce Department said the deficit widened $136.9 billion from 2004 to $804.9 billion. That represents 6.4 percent of gross domestic product, up from 5.7 percent in 2004.

The ballooning current account deficit has been attributed to high U.S. consumer spending and a low saving rate. Some economists believe it leaves the United States vulnerable to the changing appetites of foreign investors and may be unsustainable in the long run.

The report reflected a return of unilateral current transfers to more normal levels after a hurricane-related drop in outflows in the third quarter.


Separate report showed mixed results at chain stores last week. Redbook Research, an independent company, said sales at major retailers were up 2.7 percent last week from a year earlier. But sales so far in March were down 2.4 percent when compared with the same period in February, Redbook said.

A second report, by the International Council of Shopping Centers and UBS Securities, showed chain store sales edged up 0.1 percent in the week ended March 11 and rose 3.7 percent last week versus the same week a year earlier.

(With additional reporting by Meredith Davis and Oliver Ludwig in New York)