After slow March, the economy rallies

The latest evidence is an unexpected jump in retail sales, led by stronger car buying. Discount stores are still hurting.

Call it a spring spending spree.

Americans, maybe just glad to see winter behind them, are hitting the mall, going to restaurants, filling up carts at Home Depot, and buying into the bright new colors on clothing racks.

The enthusiasm in America's stores has surprised economists, who had expected high gasoline prices to mute some of American's urge to buy. Instead, the US Commerce Department reported Thursday that April retail sales rose 1.4 percent from March - the strongest showing in six months - and 4.4 percent over last year.

These numbers are considerably higher than expected and are prompting economists to declare it's more evidence the economy has turned the corner on the soft patch it hit in February and March. The retail improvement combines with the better job picture from last Friday, when the government reported 274,000 new jobs were created in April.

"I think we're going to see improved growth in the economy as we proceed," says Anthony Chan, chief economist at J.P.

Morgan Asset Management in Columbus, Ohio. "The retail sales numbers are impressive, and they're telling me we may be past the worst stages of the soft patch in the economy."

The strong retail sales are likely to make the Federal Reserve feel better about its decision to hike interest rates by a quarter percentage point last week. Now there is some discussion that the Fed might consider accelerating its pace. On Wednesday, for example, William Poole, president of the St. Louis Federal Reserve Board, suggested in a speech that the soft patch might not have been so soft. The next Fed meeting is not until the end of June.

Retail executives were particularly cheered by the April report because the sales rise came without the benefit of Easter, which was in March. "I think people overestimated the impact of higher gas prices on consumers," says Scott Krugman of the National Retail Federation (NRF) in Washington. "It put the consumer in a position to surprise."

Still, the good retail news was not universal. While large chains such as Nordstrom are reporting strong sales, analysts have lower expectations for the discounters, such as Wal-Mart, the nation's largest retailer. "Discounters are feeling the higher gas prices more than anyone else because their consumers have a tight disposable income," says Ellen Tolley of the NRF.

Indeed, Thursday Wal-Mart reported first-quarter earnings climbed 14 percent, but the results were less than Wall Street expected. In addition, the big retailer says second-quarter results could be disappointing given the cooler-than-normal weather and the higher gasoline prices. The company's CEO, in a statement, says he expects the company to do better in the second half of the year.

While much of the retail report looks backward, economists often look at the eating and drinking part of the survey to look ahead. In April, retail sales at restaurants rose by 0.9 percent, after falling in March. "If people are being cautious or they are pessimistic about their job prospects, the last thing they do is go out for an expensive meal," says Chan. "They usually cook at home."

Auto sales rebounded last month as well, rising a very strong 2.5 percent, after an 0.8 percent increase in March. "While there are anecdotal stories that dealers had to offer consumers big incentives to buy SUVs, the latest numbers also indicate they are also shifting to lighter vehicles," Richard DeKaser, chief economist at National City Corporation in Cleveland.

Teenage consumers, an important segment of the retail market, may also be shifting their purchasing. In April, sales of electronics goods fell by 0.1 percent for the second consecutive month. "For years, teens have been buying new cellphones, DVD players, or iPods - and many still are - but they are also looking at upgrading the clothes in their closets," says Ms. Tolley.

Part of this shift, she says, are some new colors such as pastel green. "We're seeing it in teen apparel, but also in men's professional attire in shirts, ties, and even pants."

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