Cars Drive Increase In Retail Sales But Record Consumer Debt Suggests Pace Won’t Last

Retailers rang up an 0.8 percent increase in sales in May, the third advance in four months due in part to the return of customers to automobile showrooms. Some analysts doubt the pace can be sustained.

“Consumer debt is now at a record 20.8 percent of income, and borrowing is slowing,” economists at Merrill Lynch & Co. told their clients in a faxed analysis. “Credit-card delinquencies and personal bankruptcies are rising.”

They also said temporary forces that boosted spending in recent months - a boom in mortgage refinancing, capital gains, early tax refunds - are receding.

As a result, the Merrill Lynch economists said, “We expect spending to slow in the second half.”

There are indications that job growth already may be moderating. The Labor Department said Thursday, for instance, that new claims for jobless benefits rose last week for a second week in a row.

But the Commerce Department reported that consumers remained active in May, when 348,000 new jobs were created, boosting retail sales to a seasonally adjusted $205.5 billion from $203.9 billion a month earlier.

Retail sales represent about one-third of the nation’s economic activity.

Although the increase was slightly below the 1 percent gain that many analysts expected, it still was strong enough to spook financial markets fearful that a robust economy will lead the Federal Reserve to boost interest rates.

The Dow Jones average lost 10.34 points Thursday as investors remained cautious.

The Commerce report also showed April sales were down just 0.1 percent, despite a 3.8 percent drop in motor vehicles. The department originally estimated that April sales fell 0.3 percent.

As a result, sales in May were 5.5 percent above those a year earlier.

Auto dealerships rebounded in May with a 2.1 percent increase. Leaving out motor vehicles, about one-fourth of the total, sales were up 0.3 percent.

Reflecting a strong housing market, sales of furniture and other home furnishing were up 1.6 percent. Purchases of building materials, hardware and garden supplies jumped 2.5 percent.

Overall, sales rose 1.9 percent on big-ticket durable items, goods expected to last more than three years, erasing a 1.8 percent loss a month earlier.

Non-durable goods sales were unchanged in May after rising 1 percent a month earlier.

Department stores rang up a 1.2 percent increase in sales on top of a 1.4 percent gain in April. Sales at apparel stores were up 0.1 percent and at drug stores 0.9 percent.

Sales at grocery stores dropped 0.5 percent and at restaurants and bars 0.8 percent.

The Labor Department report said new claims for unemployment insurance rose by 6,000 last week to a seasonally adjusted 360,000, highest since 372,000 in the week ended April 20. Claims had risen by 9,000 a week earlier.