Retail sales rise as consumer sentiment slips (Reuters)

WASHINGTON (Reuters) – Retail sales grew at the fastest pace in seven months in September as consumers shook off concerns about a weak stock market and political gridlock, giving a bit more momentum to the economic recovery.

Consumer sentiment, however, unexpectedly slipped in early October as worries about declining incomes drove a measure of expectations to the lowest level in more than 30 years.

Retail sales rose 1.1 percent in September, boosted by strong auto purchases, the Commerce Department said on Friday. The gain was stronger than economists had expected and sales for August and July were revised higher as well.

Consumer spending accounts for about two thirds of U.S. economic activity, and the report suggested the economy had more vigor over the past three months than previously believed, although it was not yet out of the woods.

The data "reflects an economy that is still struggling but won't fall back into recession," said Omer Esiner, an analyst at Commonwealth Foreign Exchange.

A separate report on business inventories also suggested economists would likely raise forecasts for economic growth in the quarter following a weak first half of the year.

Inventories, which are a key component of gross domestic product, rose slightly more than expected in August and the government said July inventories gained more than initially estimated.

"It looks like third-quarter GDP is going to be better than the first and second quarter combined," said John Canally, an investment strategist and economist for LPL Financial in Boston. The economy grew at less than a 1 percent annual rate over the first half of the year.

Separately, the Thomson Reuters/University of Michigan's preliminary reading on consumer sentiment for October sagged to 57.5 from 59.4, with an expectations reading dropping to 47.0.

Even though the U.S. recovery is strengthening, analysts warn that the economy still faces heightened recession risks. A slowdown in Europe, where debt-laden countries are enacting austerity measures, is expected to weigh heavily.

Prices for U.S. government debt fell following the retail data. Stocks rose on optimism the euro zone will continue to make progress on a solution to its debt crisis.

CONSUMER RESOLVE

Consumer confidence plunged over the summer as a bruising battle over the U.S. budget slammed stock prices and pushed the nation to the brink of default.

But Friday's retail report shows the crisis of confidence might not necessarily keep Americans from spending.

"Obviously consumers are still willing to go out and shop," said Gary Thayer, a strategist at Wells Fargo Advisors in St. Louis, Missouri.

"If the economy takes a clear turn for the worse we would expect sales to suffer, but at least this time the shock to confidence has not derailed consumer spending."

Sales of motor vehicles and parts rose 3.6 percent last month, the biggest gain since March 2010.

The U.S. economy was hit by a spike in gasoline prices early in the year and a March earthquake catastrophe in Japan that clogged up global supply conduits, hurting auto output and sales.

While autos sales are now bouncing back, even excluding autos, retail sales increased 0.6 percent in September, above forecasts for a 0.3 percent gain.

Stripping out sales of gasoline, autos and building materials, so-called core retail sales -- a figure that correspondents most closely to the consumer spending component of GDP -- rose 0.6 percent in September.

A separate report, showed U.S. import prices unexpectedly rose in September, posting their largest gain in five months on higher fuel and food costs and pointing to some build-up in imported inflation pressure.

The U.S. Federal Reserve has been more concerned about the tepid pace of the economic recovery than inflation pressures, and has said it stands ready to help the economy more if needed. It has already cut overnight lending rates to near zero and pumped about $2.3 trillion into the banking system.

(Additional reporting by Leah Schnurr, Chuck Mikolajczak and Ellen Freilich in New York, Editing by Andrea Ricci)

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Retail sales rose strongly in September on autos (AP)

WASHINGTON – U.S. consumers stepped up their spending on retail goods in September, a hopeful sign for the sluggish economy.

They spent more on autos, clothing and furniture last month to boost retail sales 1.1 percent, the Commerce Department said Friday. It was the largest gain in seven months.

Auto sales rose 3.6 percent to drive the overall increase. Still, excluding that category, sales gained a solid 0.6 percent.

The government also revised the August figures to show a 0.3 percent increase, up from its initial report of no gain.

Stocks rose after the release of the report, which is the government's first look at consumer spending each month. The Dow Jones industrial average climbed 87 points in afternoon trading. Broader indexes also rose.

A separate Commerce report showed that businesses added to their stockpiles for a 20th consecutive month in August while sales rose for a third straight month. The increase suggests businesses were confident enough in the economy to keep stocking their shelves.

Stronger consumer spending could help tamp down concerns that the economy is at risk of a recession. Consumer spending is closely watched because it accounts for 70 percent of economic activity.

The increase "shows that households are not completely down and out," said Paul Dales, senior U.S. economists for Capital Economics. Dales said the data correspond with an annual growth rate of 2 percent for consumer spending growth in the July-September quarter.

Dales cautioned that weak hiring will likely prevent consumers from spending at this rate on a month-to-month basis.

"Sales growth is unlikely to remain this strong," he said. "So although a recession has become less likely, households still can't be relied on to drag the US economy out of its continued malaise."

The jump in retail sales prompted some economists to boost their growth forecast for the July-September quarter. Dean Maki at Barclays Capital Research said his group raised its forecast to 2.5 percent, up from 2 percent.

Chris G. Christopher Jr., senior economist at IHS Global Insight, said the increase in spending was an improvement from the first half of the year. Still, he said overall growth was not enough to generate significant hiring gains.

"Do not break out the champagne. Things seem better on the consumer and retail fronts, but consumers still have many problems," he said.

The September gains were broad-based:

‧ Department stores sales increased 1.1 percent, a big turnaround from August when sales had fallen 0.5 percent. The drop was blamed in part on Hurricane Irene disrupting shopping along the East Coast.

‧ A larger category of general merchandise stores, which includes big-chain retailers including Wal-Mart and Target, showed a 0.7 percent rise last month after no gain in August.

‧ Specialty clothing stores sales rose 1.3 percent, after a 0.4 percent August drop.

‧ Sales were up 1.1 percent at furniture stores but edged down a slight 0.1 percent at hardware stores. That surprised economists, who expected more traffic from people seeking to repair damage from the hurricane.

‧ Gas station sales rose 1.2 percent.

The overall economy grew at an annual rate of 0.9 percent in the first six months of the year. That was the weakest growth since the recession ended in June 2009.

High unemployment and steep gasoline prices forced many consumers to cut back on spending this spring. Without more jobs or higher pay increases, they are likely to keep spending cautiously.

In September, the economy generated 103,000 net jobs. That's enough to calm recession fears, but it is far from what is needed to lower the unemployment rate, which stayed at 9.1 percent for the third straight month.

Employers have added an average of only 72,000 jobs in the past five months. That's far below the 125,000 per month needed to keep up with population growth. And it's down from an average of 180,000 in the first four months of this year.

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September auto sales up, allaying fears of recession (Reuters)

DETROIT (Reuters) – Major automakers posted double-digit percentage U.S. sales gains for September in a rebound that General Motors Co said showed the economy was likely to steer clear of a double-dip recession.

Among the Detroit automakers, GM sales rose 20 percent, while Ford's rose 9 percent and Chrysler Group was up 27 percent. Nissan Motor Co saw a sales gain of 25 percent and Volkswagen AG posted a sales increase of 36 percent.

The initial sales reports put industrywide sales on track to near 13 million vehicles on an annualized basis, at the high end of the range of analysts' forecasts.

That would represent the strongest sales pace since April and an increase of roughly 10 percent from the sales rate of September 2010.

Last month's auto sales were bolstered by increased inventory levels for Japanese automakers that had been depleted through the summer, by steady gasoline prices and a trickle back of demand from customers looking to replace aging vehicles, executives and analysts said.

GM sales chief Don Johnson said the September auto sales and other recent economic data "all point to a slow growth scenario but not a double dip."

GM kept its forecast for industrywide auto sales unchanged and said it expected to see increasing sales in October through December.

The top U.S. automaker forecasts overall U.S. vehicle sales of at least 13 million, including medium and heavy duty trucks. That would be up from the sales rate of 12.8 million on that basis in the year to date.

In another indicator of economic resilience, U.S. factory activity expanded at a faster pace than expected in September, the Institute for Supply Management said on Monday.

VW America Chief Executive Jonathan Browning said the September sales results pointed to a moderate increase in U.S. auto sales through the remainder of the year.

"It's hard to give a very simple summary because a lot of people are anxious about the future and you see that in the consumer sentiment, consumer confidence surveys, but at the same time many people are recognizing that this is a good time to buy," he said.

U.S. auto sales represent one of the earliest snapshots of consumer demand.

GM shares were up 1 percent at $20.41 around midday and Ford Motor Co shares were flat at $9.67.

CHRYSLER'S BEST SEPT. SINCE 2007

Chrysler, the No. 3 U.S. automaker, had its best performance for September since 2007. Chrysler is managed and primarily owned by Italy's Fiat SpA.

Stronger showings by Toyota Motor Corp and Honda Motor Co are expected, after the top two Japanese automakers in the U.S. market have returned to full production after having inventories slimmed after the March earthquake and tsunami in Japan.

During the past summer -- typically a busy sales period -- some consumers had held back from shopping for vehicles because the major Japanese automakers had an unusually spare stock of cars on dealer lots.

"A vehicle in content and color isn't something people are likely to compromise. They're more likely to wait. Now this is a release of some pent-up demand, which is exactly what we want to see," said IHS analyst Rebecca Lindland.

Both Toyota and Honda also increased sales incentives in September to lure back consumers, analysts have said.

U.S. new light vehicle auto sales were averaging 13.1 million on a seasonally adjusted annualized basis in the first four months of the year. A diminished supply of vehicles and auto parts began to cut into sales beginning in May.

The annualized sales rate dipped to 11.8 million vehicles from May to August.

Analyst Peter Nesvold of Jefferies & Co said last week that September will be the first month since April not to reflect the effects of the Japanese earthquake and the resulting production disruption.

J.D. Power & Associates as well as Edmunds.com forecast that September sales will be 12.9 million vehicles on the seasonally adjusted annualized basis the industry uses to monitor sales strength.

Before the industry downturn during the recent recession, U.S. also sales averaged nearly 17 million vehicles a year. Sales began to fall in 2008 and by 2009 hit the lowest level since the early 1980s, at 10.4 million vehicles sold.

(Reporting by Bernie Woodall and Ben Klayman, writing by Kevin Krolicki, editing by Matthew Lewis)

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Flat retail sales keeps U.S. on recession watch (Reuters)

WASHINGTON (Reuters) – Growth in U.S. retail sales stalled in August after a spending battle in Congress crushed consumer sentiment, leaving the economy perched uncomfortably close to recession.

The weak data puts more pressure on the U.S. Federal Reserve to try to boost growth, while a report showing flat wholesale prices in August could support arguments within the central bank to take action.

"The slowdown in the economy is real," said Steven Ricchiuto, chief economist at Mizuho Securities in New York. "It's a broad-based slowdown, and that's pivotal."

Retail sales were unchanged last month from July, the Commerce Department said on Wednesday. The government also lowered previous estimates for growth during June and July.

The data was the latest hard evidence the United States is flirting with recession. Other reports have shown there was no employment growth in August, while claims for jobless benefits rose in early September.

Consumer confidence plunged last month after a battle over the deficit slammed stock prices and pushed the nation to the brink of default. The country's debt was then downgraded.

"The consumer reacted to the debt ceiling (argument), the downgrade and the equity market swoon by basically hunkering down and not spending," said Tom Porcelli, senior U.S. economist at RBC Capital Markets in New York.

Citing the weak data, Nomura cut its forecast for third-quarter economic growth to 2.4 percent from 2.6 percent.

However, major U.S. stock indexes shook off the data and rose after the head of the European Commission said he would soon present options for the introduction of euro area bonds, which could help the region fight its debt crisis.

RECESSION FEARS

Consumer spending accounts for about two-thirds of U.S. economic activity, and the retail sales figures showed spending during the first two months of the third quarter was weaker than many forecasters expected.

An increase in sales of electronics, gasoline and food was balanced with drops in purchases of cars, furniture and clothes. Spending at restaurants and bars also dipped.

A gauge that hews most closely to the measure the government uses in calculating GDP rose just 0.1 percent.

A Reuters poll released on Wednesday found economists see a nearly one-in-three chance the United States could re-enter recession. Many economists expect the Fed will unveil new measures to boost growth next Tuesday following a two-day meeting.

U.S. households still feel the pain from the country's 2007-2009 recession. A report on Tuesday showed the U.S. poverty rate -- already the highest in the developed world -- rose last year to 15.1 percent, its highest level since 1993.

Companies are also feeling the pinch. Best Buy Co cut its profit outlook for the year on Tuesday, citing economic uncertainty.

Policymakers are struggling to counter the weakness.

President Barack Obama is lobbying Congress to approve his recently unveiled job stimulus program but opposition Republicans have harshly criticized parts of the plan.

Fed Chairman Ben Bernanke has hinted at further monetary stimulus, although three policymakers within the central bank last month dissented over a pledge to keep interest rates low into 2013.

A separate report on Wednesday from the Labor Department showed prices received by U.S. producers were unchanged in August, held down by a drop in energy costs. That could help keep inflation from being an immediate roadblock to further monetary stimulus.

Another report from the Commerce Department showed U.S. business inventories rose slightly less than expected in July, suggesting firms remained cautious about future demand.

Economic growth slowed sharply during the first half of the year, leaving the economy vulnerable to potential shocks like an escalation of Europe's debt crisis.

U.S. Treasury Secretary Timothy Geithner urged Europe to move more aggressively to solve its troubles, but said it has the financial and economic capacity to do so.

(Additional reporting by Mark Felsenthal in Washington and Richard Leong and Emily Flitter in New York; Editing by Andrea Ricci, Neil Stempleman and Dan Grebler)

(jason.lange@thomsonreuters.com; +1 202 310 5487; Reuters Messaging: jason.lange.reuters.com@reuters.net))

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China says didn't know of arms sales talks with Gaddafi forces (Reuters)

BEIJING (Reuters) – Chinese arms firms held talks with representatives of Muammar Gaddafi's beleaguered forces in July over weapons sales, but behind Beijing's back, the Chinese Foreign Ministry said on Monday.

The revelation is nonetheless likely to deal a fresh blow to China's already delicate relations with Libyan rebel forces that have ousted Gaddafi.

The ministry confirmed the gist of reports in the Globe and Mail and the New York Times that documents found in the Libyan capital, Tripoli, indicated that Chinese companies offered to sell rocket launchers, anti-tank missiles and other arms with a total of some $200 million to Gaddafi's forces, despite a U.N. ban on such sales.

A ministry spokeswoman, Jiang Yu, said members of Gaddafi's government had come to China and held talks with a "handful" of Chinese arms company officials without the knowledge of the government.

"We have clarified with the relevant agencies that in July the Gaddafi government sent personnel to China without the knowledge of the Chinese government and they engaged in contact with a handful of people from the companies concerned," Jiang told a news briefing in Beijing.

"The Chinese companies did not sign arms trade contacts, nor did they export military items to Libya," Jiang said. "I believe that the agencies in charge of the arms trade will certainly treat this seriously."

Even if the arms talks were behind Beijing's back, the controversy could intensify mistrust between Beijing and the rebels seeking to defeat Gaddafi's shrinking forces and claim control of all Libya.

"We have hard evidence of deals going on between China and Gaddafi, and we have all the documents to prove it," a rebel military spokesman, Abdulrahman Busin, told the Times.

The arms issue comes on the heels of tensions between Beijing and the Libyan rebels over frozen funds.

On the weekend, the head of Libya's rebel National Transitional Council (NTC), Mustafa Abdel Jalil, said China had obstructed the release of some of Libya's frozen assets.

Although China agreed with other powers last week to unfreeze $15 billion of Libyan assets abroad, it opposed handing control of more to the interim ruling council, according to Libyan rebel spokesman Shamsiddin Abdulmolah.

"In principle, we don't have a problem" with unfreezing funds, said the Chinese spokeswoman Jiang.

"But out of a responsible attitude, we and some members of the Security Council want further explanation and information from the applicant countries about the uses of the funds and oversight of them," she said.

Libya's interim council has promised rewards for those who took a leading role in backing the revolt against Gaddafi, and that has raised concerns that China could be disadvantaged.

China is the world's second-biggest oil consumer and last year obtained 3 percent of its imported crude from Libya.

China did not use its U.N. Security Council veto power in March to block a resolution that authorized the NATO bombing campaign against Gaddafi's forces, but it condemned the expanding strikes and repeatedly urged compromise between his government and the rebels.

By the time of the visit by Gaddafi's officials, China was already courting the Libyan rebels. But China has not joined Western powers in formally recognizing the NTC as the legitimate authority in Libya, but has acknowledged its "important role" after Gaddafi's ousting.

The reports said Libyan security officials visiting China in July were received by three arms companies, including Norinco and the China Xinxing Import and Export Corporation.

Norinco has faced sanctions from the United States, which accused it of selling missile parts to Iran, in spite of Beijing's arms control rules.

Asked if the Chinese companies or their personnel could be punished over the talks with Gaddafi's officials, Jiang said: "I'm sure that the agencies in charge of Chinese arms (sales) will deal with this in a serious and conscientious way."

(Reporting by Chris Buckley; Editing by Nick Macfie)

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Wall St up as retail sales overshadow sentiment (Reuters)

NEW YORK (Reuters) – U.S. stocks rose about 1 percent on Friday as mildly encouraging retail sales put the S&P on track for a two-day winning streak for the first time since mid-July as investors shrugged off weak consumer sentiment data.

Still, the market was on track for its worst three-week decline since March of 2009, when stocks hit 12-year lows.

Trading remained volatile, with stocks retreating after the sentiment reading, then rebounding by midday.

U.S. consumer sentiment fell to its lowest level since 1980, but retail sales posted their biggest gains in three months in July.

"On the whole, the market just went overboard and discounted a lot of terrible things that probably won't happen." said John Carey, portfolio manager at Pioneer Investments in Boston.

"At some point people will look around and see that a lot of stocks are very attractively priced."

The Dow Jones industrial average gained 143.50 points, or 1.29 percent, to 11,286.81. The Standard & Poor's 500 Index rose 9.90 points, or 0.84 percent, to 1,182.54. The Nasdaq Composite Index added 18.43 points, or 0.74 percent, to 2,511.11.

If the S&P 500 ends higher, it will be the index's first two-day streak since July 21-22. It has fallen for 11 of the past 14 days.

European shares closed up 3.6 percent, helped by a short-selling ban on financial shares by France, Italy, Spain and Belgium and European Central Bank data that eased fears some banks faced liquidity issues.

"That's been part of the problem. The political leadership here and in Europe has been uninspiring and indecisive, so the markets have had to sort out a lot of things for themselves and it's been a real struggle," said Carey.

Among individual stocks, Nvidia Corp shed 1.9 percent to $13.16, giving back early gains a day after it forecast a larger-than-expected jump in revenue. Some analysts were surprised with the lack of growth of one of its much-touted processors.

Dillard's Inc slumped 16.1 percent to $42.56 after it posted quarterly profits below estimates.

The majority of S&P indexes were in positive territory. Advancers beat decliners on the New York Stock Exchange by about three-to-one, while the ratio on the Nasdaq was about three-to-two.

(Reporting by Chuck Mikolajczak; editing by Jeffrey Benkoe)

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Retailers report solid sales gains for July (AP)

NEW YORK – Many retailers posted solid sales during the kickoff to the back-to-school season as discounts and high temperatures in July drove shoppers to air-conditioned malls. But merchants worry that momentum won't continue through the remainder of the second-biggest shopping period of the year as the weather gets cold and the deals dry up.

Despite a flow of bad economic news that kept consumer confidence shaky, a number of retailers reported July sales on Thursday that beat Wall Street estimates, including discounter Target, department store Macy's, and luxury chain Saks. The International Council of Shopping Centers' preliminary tally of retailers' sales at stores open at least a year — a key indicator of a merchant's health — was up 4.6 percent, a slower pace than June's 6.9 percent gain but in line with forecasts.

While the numbers signal a strong start to the back-to-school shopping period, which runs roughly between mid-July through September, there are concerns that shoppers will soon return to their habits of the Great Recession by focusing on necessities and waiting for sales. That could be a big problem for retailers, which are raising prices in order to offset with rising fuel, labor and other production costs.

"Early going, July looks like it's shaping up to be a solid month despite all the economic headwinds," said Ken Perkins, president of RetailMetrics LLC., a research firm. "But the concern is whether shoppers will buy back-to-school items at full price."

The concern stems from the fact that while the recession officially ended in June 2009, many shoppers, particularly in the low-to-middle income bracket, feel like it never ended. After all, the economic picture for most has not improved.

For many, wage gains haven't kept pace with higher household costs for food and gas, which is $1 more per gallon than a year ago. Home values remain depressed, and companies are not hiring. Adding to that, this fall, shoppers will face higher price tags as retailers try to offset higher labor costs in China and prices of raw materials.

In this environment, retailers that cater to higher-income shoppers have fared the best. The biggest standouts have been luxury retailers like Saks Inc., which had a 15.6 percent increase for the month. That was much higher than the 8.5 percent forecast

Wholesale club operator Costco Wholesale Corp. also managed to attract higher income shoppers and others who like the treasure hunt experience in its stores. The company, which is based in Issaquah, Wash., said revenue from stores open at least a year climbed 10 percent in July, compared with the 8.6 percent analysts surveyed by Thomson Reuters had predicted.

Meanwhile, those catering to the low- and middle-income shoppers have been hurt the most by the economic downturn. Still, many of those retailers posted sales gains during the month.

Target, which has been beefing up its grocery business, said revenue at stores opened at least a year rose 4.1 percent in July as shoppers picked up more groceries and health and beauty products. Target said consumers spent more per transaction and it expects the key revenue measure to rise in the low- to mid-single digits in August. The company said back-to-school sales are off to "a solid start."

Many department stores also had respectable results as they drew shoppers in with exclusive merchandise and sales on select items. J.C. Penney Co.'s 3.3 percent beat the 2.3 percent estimate from Wall Street. And Macy's Inc. posted a 5 percent gain, which exceeded the 4.1 percent forecast.

Macy's, which also runs Bloomingdale's stores, benefited from growing online sales. CEO Terry Lundgren also said that "fresh, interesting and distinctive merchandise," a "re-energized" culture, and better employee sales skills, also helped.

The hope among retailers is that the July sales momentum will continue into August, with shoppers picking up a few fall items at full price while buying some summer bargains, too. But surveys from the National Retail Federation, Deloitte L.L.P. and other groups show that customers plan to buy only what the family needs, focus on fat discounts and reuse last year's items.

"It's going to be tough for retailers to succeed because of the economic uncertainty," said Stifel Nicolaus analyst Richard Jaffe.

The back-to-school season is important for retailers because it accounts for 16.1 percent of annual retailers' revenues, according to the International Council of Shopping Centers. It's also an opportunity for retailers to gain insight into consumers' shopping habits heading into the biggest shopping season of the year, which starts on the day after Thanksgiving.

Retailers will get a better sense of how shoppers are spending during the back-to-school shopping season in August. So far, analysts and retail trade groups are sticking to their forecasts for the season, ranging from unchanged to 3 percent compared with a year ago. The National Retail Federation expects families to spend $603.63 on back-to-school items, from clothing to supplies, down slightly from last year's $606.40.

But not every retailer posted encouraging results during the beginning of the back-to-school season. Gap said it had a 5 percent drop in revenue at stores opened at least a year in July, worse than the 0.7 percent decline that analysts had expected. Its namesake division, Old Navy and Banana Republic as well as its overseas business, all posted drops. Still, the retailer offered a profit outlook that was above Wall Street estimates because of improvements in inventory.

Department-store chain Kohl's Corp. also posted disappointing results, with a 4.6 percent drop. That was well below the 3.4 percent gain that Wall Street analysts had expected. And teen retailer Aeropostale Inc. had a 14 percent drop in revenue at stores opened at least a year.

"We are very disappointed with our second-quarter financial results that were clearly unacceptable," said Thomas P. Johnson, chief executive officer at Aeropostale in a statement.

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High cancellations depress homes sales (Reuters)

WASHINGTON (Reuters) – Sales of previously owned homes hit a seven-month low in June as demand for condominiums fell and contract cancellations surged, dampening hopes the distressed housing market was starting to improve.

The National Association of Realtors said on Wednesday sales fell 0.8 percent last month from May to an annual rate of 4.77 million units, the lowest since November, and declining for a third straight month.

Economists had expected sales to rise to a 4.90 million-unit pace.

The drop in sales was surprising given that pending home sales contracts rebounded in May, and it eroded optimism over the sector that had been lifted by a report on Tuesday showing a jump in home construction to a six-month high in June.

Cancellation of contracts was the chief driver behind the drop in June sales, the Realtors said, but it could not give a specific reason. However, the group noted the sluggish economy, especially the weak labor market and tight lending conditions.

"Buyers and sellers are increasingly running up against conservative appraisals, which often cause deals to fall through or be delayed," said Mark Vitner, senior economist at Wells Fargo Securities in Charlotte, North Carolina.

DEMAND REMAINS WEAK

The market is not likely to soften further, but is unlikely to improve in the near term, added Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.

"The jump in housing starts for June was likely just a fluke, a catch-up after a period of weather distortions," he added.

The sales drop could add to concerns about the economy's ability to swiftly rebound this quarter after stumbling badly in the first half of the year.

Continued weakness in the housing market, still struggling with an over-supply of for-sale and foreclosed properties, is helping to constrain growth.

Government data next week is expected to confirm the economy lost further ground in the second quarter after a pedestrian 1.9 percent annual growth pace in the January-March period.

U.S. stocks were little changed after the report, despite Apple's shares hitting an all-time high after it reported quarterly revenues far above expectations.

Results from the iPhone and iPad maker followed similarly strong numbers from IBM and Coca-Cola, which showed U.S. companies were faring well despite the tepid economy.

Bond prices fell amid debt concerns in both Europe and Washington. The dollar weakened against a basket of currencies.

Canceled contracts rose to a 16 percent rate from 4 percent in May. This was the highest since the Realtors group started tracking cancellations last year and was well above the usual rate of 9 percent to 10 percent.

The decline in sales last month was concentrated in condominiums, with single-family home sales flat. Single-family homes account for a large portion of the home resale market.

PURCHASE MORTGAGE APPLICATIONS DIP

Data on mortgage applications offered little hope that sales would rise much in the months ahead.

Demand for home purchase loans dipped last week, the Mortgage Bankers Association said in a separate report, but low mortgage rates boosted applications for refinancing.

"We can't expect too much in July as mortgage applications for new purchases have dropped for the second month in a row and are lower in two of the past three ... weeks so far in July," said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto.

But there were some glimmers of hope in the Realtors report, with home prices rising despite the weak sales pace and an increase in inventory. The median home price climbed 0.8 percent in June from a year earlier to $184,300.

Some economists attributed the rise to a shift in the mix of sales away from condominiums and purchases by first-time home buyers, adding that higher pricing could encourage more home building in the months ahead.

"For builders the rise in existing home prices is a start," said Joel Naroff of Naroff Economic Advisors in Holland, Pennsylvania.

"Clearly, prices need to increase a whole lot more but we may finally have found the bottom in prices and that points to more healing of the housing sector in the months to come."

Home prices rose in the Northeast and West regions, which are typically expensive markets.

June's sales pace pushed the supply of existing homes on the market 9.5 months' worth, the highest since November, from 9.1 months' worth in May. A supply of between six and seven months is generally considered ideal.

Foreclosures and short sales, which typically occur below market value, made up 30 percent of transactions last month, slipping from 31 percent the prior month. All-cash purchases accounted for 29 percent of transactions in June.

(Reporting by Lucia Mutikani; Editing by Neil Stempleman)

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Jobless claims fall, but retail sales timid (Reuters)

WASHINGTON (Reuters) – The U.S. economy will struggle to regain speed in the second half of the year, new data on Thursday suggested, as the number of Americans filing for first-time jobless benefits remained high and retail sales barely rose in June.

But a drop in energy costs, which caused wholesale prices to post their biggest fall last month in 1-1/2 years, could boost consumer spending and give the economy much needed impetus after growth faltered early in 2011.

Initial claims for state unemployment benefits fell 22,000 to 405,000 last week, the lowest since mid-April, the Labor Department said. Economists expected claims to drop to 415,000. Still, claims held above the 400,000 level usually associated with a stable labor market.

Economists also cautioned against reading to much into the decline in jobless claims last week, which included the July 4 Independence Day holiday. Claims are volatile around this time of year because automakers normally shut plants for annual retooling.

There were fewer plant shut downs this year, however, after vehicle production was disrupted because of a shortage of parts from Japan in the aftermath of the March earthquake.

"The economy is touch and go. You really need to take the improvement in claims with a grain of salt. It feels like the labor market is moving sideways," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania.

Retail sales rose 0.1 percent as a rebound in receipts from auto dealers offset the biggest drop in gasoline receipts in a year, a Commerce Department report showed, after dipping 0.1 percent in May.

Economists had expected sales to slip 0.1 percent. Sales excluding gasoline rebounded 0.3 percent after declining 0.2 percent in May.

Federal Reserve Chairman Ben Bernanke on Thursday reiterated the U.S. central bank, which ended a $600 billion government bond-buying program in June, was ready to ease monetary policy further if growth and inflation slowed much more.

Data last week showed employment growth stalled in June, with nonfarm payrolls growing by only 18,000 jobs and the unemployment rate rising to 9.2 percent.

Investors were encouraged by the drop in jobless claims and a higher-than-expected profit from JPMorgan Chase & Co, lifting U.S. stocks and modestly pushing down prices for U.S. government debt.

JPMorgan, the second-largest U.S. bank, made more loans during the quarter than in the first quarter and added staff, signs other banks could be lending more and leading to further growth.

WEAK CONSUMER SPENDING

The U.S. economy has been hurt by high commodity prices and supply chain disruptions from Japan.

The retail sales report suggested that growth in consumer spending in the April-June period would be less than the 2.2 percent annual pace in the first quarter.

Another report from the Commerce Department showed business inventories were starting to pile up because of weak demand. Inventories increased 1 percent in both May and April.

"The picture for June retail spending was definitely weak, though from some perspectives it wasn't terrible," said Michael Feroli, an economist at JPMorgan in New York. "Real consumer spending in the second quarter looks like it only advanced at a paltry 0.6 percent annual rate."

But the drop in gasoline prices from their peak just above $4.00 a gallon in May should help to ease stretched household budgets and support spending in coming months.

The Producer Price Index fell 0.4 percent, the steepest decline since February 2010, the Labor Department said in a second report, after a 0.2 percent rise in May.

Last month, sales at service stations dropped 1.3 percent, the largest decline since June last year, reflecting a 22.5 cent per gallon decline in gasoline at the pump in June.

That decline was mitigated by a 0.8 percent bounce back in motor vehicles receipts, indicating an easing in shortages related to supply chain disruptions from Japan. Motor vehicle sales declined 1.8 percent in May.

Excluding autos, retail sales were flat last month, the weakest reading since last July, after rising 0.2 percent in May. Clothing store receipts rose 0.7 percent last month and sales at building materials and garden equipment suppliers increased 1.3 percent.

Receipts at sporting goods, hobby, book and music stores fell 0.7 percent, however, while sales of electronics and appliances dipped 0.2 percent.

Core retail sales -- excluding autos, gasoline and building materials -- edged up 0.1 percent in June after gaining 0.1 percent the prior month. They correspond closely with the consumer spending component of the government's GDP report.

(Additional reporting by Pedro Nicolaci da Costa; Editing by Padraic Cassidy)

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GM's U.S. June sales below forecasts (Reuters)

DETROIT (Reuters) – General Motors Co on Friday reported a weaker-than-expected gain in June U.S. sales and tempered its full-year forecast for the industry as some consumers were still holding back on buying cars.

"Some consumers have decided to sit on their hands and delay their purchasing," GM U.S. sales chief Don Johnson told reporters on a conference call.

"We view this as temporary and we do expect to see a return to our projected SAAR trend line for the year," he added, referring to the seasonally adjusted annual rate of sales or SAAR.

Monthly car sales figures are among the first snapshots of consumer demand. Investors hope the industry can reverse May's disappointing results, which raised fears the U.S. recovery was running out of steam.

Investors received good news more broadly as the pace of growth in the U.S. manufacturing sector picked up for the first time in four months in June, a sign of optimism for the sputtering economy.

"We think the recovery will get back on track despite the slow housing market and the stubborn levels of unemployment," Johnson said.

However, he said the U.S. auto industry was likely to finish at "the lower end" of the company's forecast for 2011 sales of 13 million to 13.5 million.

GM reported sales last month, excluding four brands it dropped, of 215,358 cars and trucks, up 10.5 percent from 194,828 last year. GM sold or discontinued Pontiac, Saturn, Saab and Hummer.

Several analysts had expected GM to report a gain in the range of 11 percent to almost 20 percent. The U.S. automaker also came in below expectations in May.

The rest of the automakers are scheduled to report their June sales later on Friday.

U.S. auto sales in June are expected to rise only 2 percent from May -- but by a healthier 8 percent on a year-over-year basis. The May figures reflected tighter inventory caused by Japan's March 11 earthquake, which caused vehicle prices to spike and led more consumers than expected to hold off on buying cars.

For June, the average forecast of 41 economists surveyed by Reuters was for a sales rate on a seasonally adjusted annualized basis of 12 million vehicles, up from 11.1 million last year and 11.8 million in May.

That is below an average of 13.1 million new light vehicles sold on an annualized basis in the first four months of the year, before the Japan earthquake significantly affected sales.

GM shares were up 6 cents at $30.42 at midday on Friday. Shares of Ford Motor Co were up 1.2 percent at $13.95, while the broad S&P 500 Index was up 0.9 percent.

(Reporting by Deepa Seetharaman and Ben Klayman in Detroit, editing by Matthew Lewis)

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Court overturns ban on video game sales to kids (AP)

By JESSE J. HOLLAND, Associated Press Jesse J. Holland, Associated Press – 6?mins?ago

WASHINGTON – The Supreme Court on Monday refused to let California clamp down on the sale or rental of violent video games to children, saying governments lack authority to "restrict the ideas to which children may be exposed" despite complaints that the popular and fast-changing technology allows the young to simulate acts of brutality.

On a 7-2 vote, the high court upheld a federal appeals court decision to throw out California's ban on the sale or rental of violent video games to minors. The 9th U.S. Circuit Court of Appeals in Sacramento had ruled that the law violated minors' rights under the First Amendment, and the high court agreed.

"No doubt a state possesses legitimate power to protect children from harm," said Justice Antonin Scalia, who wrote the majority opinion. "But that does not include a free-floating power to restrict the ideas to which children may be exposed."

Video game makers and sellers celebrated their victory, saying the decision puts them on the same legal footing as other forms of entertainment. "There now can be no argument whether video games are entitled to the same protection as books, movies, music, and other expressive entertainment," said Bo Andersen, president and CEO of the Entertainment Merchants Association.

More than 46 million American households have at least one video-game system, with the industry bringing in at least $18 billion in 2010. The video game industry has its own rating labeling system intended to warn parents, with the rating "M" placed on games that are considered to be especially violent.

But at least two justices, Chief Justice John Roberts and Justice Samuel Alito, indicated they would be willing to reconsider his vote throwing out the law, taking issue with the sweep of the court's holding.

"I would not squelch legislative efforts to deal with what is perceived by some to be a significant and developing social problem," Alito said, suggesting that a narrower state law might be upheld.

And an unlikely duo, conservative-leaning Clarence Thomas and liberal-leaning Stephen Breyer, agreed that the California video game ban should have been upheld, but for different reasons.

Breyer said the court's decision creates an insurmountable conflict in the First Amendment, especially considering that justices have upheld bans on the sale of pornography to children.

"What sense does it make to forbid selling to a 13-year-old boy a magazine with an image of a nude woman, while protecting the sale to that 13-year-old of an interactive video game in which he actively, but virtually, binds and gags the woman, then tortures and kills her?" Breyer said. "What kind of First Amendment would permit the government to protect children by restricting sales of that extremely violent video game only when the woman — bound, gagged, tortured and killed — is also topless."

And Thomas said the majority read something into the First Amendment that isn't there.

"The practices and beliefs of the founding generation establish that "the freedom of speech," as originally understood, does not include a right to speak to minors (or a right of minors to access speech) without going through the minors' parents or guardians," Thomas wrote.

Leland Yee, a child psychologist and California state senator who wrote the video game ban, told The Associated Press Monday that he was reading the dissents in hope of finding a way to reintroduce the law in a way it would be constitutional.

"It's disappointing the court didn't understand just how violent these games are," Yee told The AP.

California's 2005 law would have prohibited anyone under 18 from buying or renting games that give players the option of "killing, maiming, dismembering, or sexually assaulting an image of a human being." Parents would have been able to buy the games for their children, but retailers who sell directly to minors would have faced fines of up to $1,000 for each game sold.

That means that children would have needed an adult to get games like "Postal 2," the first-person shooter by developer Running With Scissors that features the ability to light unarmed bystanders on fire. It would also apply to the popular "Grand Theft Auto IV," a third-person shoot-'em-up from Rockstar Games that allows gamers to portray carjacking, gun-toting gangsters.

The California law never took effect. Lower courts have said the law violates minors' constitutional rights, and that California lacked enough evidence to prove that violent games cause physical and psychological harm to minors. Courts in six other states, including Michigan and Illinois, reached similar conclusions, striking down similar bans.

Unlike depictions of "sexual conduct," Scalia said, there is no tradition in the United States of restricting children's access to depictions of violence, pointing out the violence in the original depiction of many popular children's fairy tales like Hansel and Gretel, Cinderella and Snow White.

Hansel and Gretel kill their captor by baking her in an oven, Cinderella's evil stepsisters have their eyes pecked out by doves and the evil queen in Snow White is forced to wear red hot slippers and dance until she is dead, Scalia said.

"Certainly the books we give children to read — or read to them when they are younger — contain no shortage of gore," Scalia added.

And there is no definitive proof that violent video games cause harm to children, or any more harm than another other form of entertainment, he said.

One doctor "admits that the same effects have been found when children watch cartoons starring Bugs Bunny or the Road Runner or when they play video games like Sonic the Hedgehog that are rated `E' or even when they `view a picture of a gun," Scalia said. "Of course, California has (wisely) declined to restrict Saturday morning cartoon, the sale of games rated for young children, or the distribution of pictures of guns."

The case is Brown v. Entertainment Merchants Association, 08-1448.

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Associated Press Writer Paul Elias contributed to this story.

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