US consumers defy recession

Gasoline prices jumped 7% in April

US retail sales and consumer confidence are surging back according to latest figures - raising hopes that the country can avoid a full-blown recession.

It doesn't look like from what we are seeing this morning that the economy is recessionary

Josh Stiles, senior bond strategist at Ideaglobal.com

Wholesale price inflation was also lower than expected in April - another sign that the country's economic downturn may not be as savage as some analysts have predicted.

The University of Michigan's consumer sentiment index rose unexpectedly in May, ending a long slide that began late last year.

The change suggests consumer spending, which so far has weathered the US slowdown, may be stronger than expected.

Meanwhile, retail sales rose by 0.8% in April, beating expectations, compared to a 0.4% fall in March, according to government figures released on Friday.

Kick-start

The raft of upbeat news is likely to meet with a mixed reaction on Wall Street, however, where investors are pinning their hopes on further interest rate cuts in the months ahead.

I don't think it is going to take us away from a 50 basis point cut on Tuesday

Alan Ruskin, 4cast

The Federal Reserve has already slashed rates four times this year in an attempt to kick-start the faltering economy.

And economists are predicting another 0.5% rate reduction when the Fed meets on Tuesday next week, bringing rates to a 4%, compared to 6.50% at the beginning of the year.

Rate doubts

The US government said retail sales rose by 0.8% in April, far more than the 0.2% rise many economists had expected.

Excluding cars, sales rose 0.7% compared to a revised 0.4% fall in March.

The April producer price index (PPI) rose by 0.3% in April compared to forecasts for a 0.4% rise and a 0.1% decline in March.

Excluding volatile food and energy prices, the PPI rose by 0.2% versus a 0.1% rise the prior month.

"It doesn't look like from what we are seeing this morning that the economy is recessionary, and now it's probably going to cast some doubt on how aggressive the Fed is going to want to be from here," said Josh Stiles, senior bond strategist at IDEAglobal.com.

Gasoline prices

But the politically senstive price of gasoline is still rising quickly as the US holiday season begins.

In April, overall energy prices rose a tiny 0.1% after falling by 2.6% in March.

Gasoline prices jumped 7% in April, the largest increase since June 2000, when they rocketed upward by 18.1%.

Over the last two weeks, the average retail price for gasoline in the United States increased 8.58 cents to $1.76 a gallon, according to the Lundberg Survey of 8,000 service stations nationwide.

Motorists in the Midwest and West saw the biggest jumps at the pump.

Fed decision

Alan Ruskin, research director, 4cast inc, New York, said: "The Michigan numbers are significantly on the upside, although some of this might be reflective of the recovery in the stock market, which might embody information we already knew.

"But taken in conjunction with the retail sales numbers, while you obviously had downward revisions to March, but the fact that the second quarter is getting off to a stronger start means you have a stronger chance of recording positive quarterly growth and avoiding a recession.

"As far as the Fed is concerned, I don't think it is going to take us away from a 50 basis point cut on Tuesday.

"Even if the Fed is thinking we should do 25, and they are wavering over the last 25, then they are thinking they should deliver the final 25 as an insurance policy."