WRAPUP 3-Strong US retail sales showcase economy's resilience despite Iran war

US retail sales unexpectedly rose in May, driven by motor vehicle purchases, but a slowdown is anticipated as tax refund benefits wane and inflation concerns grow.

U.S. retail ​sales increased more than expected in May, with households boosting purchases of motor vehicles even as they ‌paid more ​for gasoline, but a slowdown is likely as the cushion from larger tax refunds against higher prices diminishes. The fourth straight month of strong retail sales reported by the Commerce Department on Wednesday added to a recent pickup in job growth in highlighting the economy's resilience despite the oil price shock from the U.S.-led war with Iran, which is stoking inflation. The Federal Reserve on Wednesday kept its benchmark overnight interest rate in the 3.50%-3.75% range, but updated quarterly projections ‌show policymakers expect to raise borrowing costs this year amid growing concerns about inflation. The Fed described economic activity as "expanding at a solid pace despite elevated uncertainty" from the conflict in the Middle East. "Risks to the outlook for consumer spending are to the downside. Much of the strength is coming from the stock market, a correction tied to tech stocks would lead high-income households to pull back on their spending," said Gus Faucher, chief economist at PNC Financial. "A resumption of hostilities in the Middle East could drive energy prices higher again and the Fed is more likely to hike than cut rates this year." Retail sales jumped 0.9% last month after ‌a downwardly revised 0.4% gain in April, the Commerce Department's Census Bureau said. Economists polled by Reuters forecast retail sales, which are mostly goods and are not adjusted for inflation, would rise 0.5% after a previously reported 0.5% increase in April. When adjusted for inflation, retail sales increased 0.4%, economists estimated.

Sales ‌advanced 6.9% on a year-over-year basis in May. The rise is in stark contrast with consumer sentiment, which has tanked amid anxiety over inflation. Some economists said the strong sales performance suggested that consumers believed higher prices at the pump would be temporary. Gasoline prices surged to four-year highs as a result of the war in the Middle East. They have since retreated, with the national retail average slipping below $4 a gallon this week for the first time since April. The U.S. and Iran on Sunday said they had agreed on terms to end the war and reopen the Strait of Hormuz. President Donald Trump said on Wednesday the interim accord with Iran was not final, and he could resume a bombing campaign if he did not like it or if ⁠Tehran did not "behave." Gasoline prices ​helped to boost service station receipts 3.4% in May, accounting for part of the ⁠increase in retail sales last month. Service station sales rose 2.4% in April and soared 26.5% on a year-over-year basis in May.

Tax refunds have combined with a stock market rally to underpin spending, which also has come at the expense of savings. Economists said spending continued to be driven by higher-income consumers while the pain at the pump was disproportionately falling on lower-income households. Stocks ⁠on Wall Street fell on the Fed's projections of a rate hike. The dollar gained versus a basket of currencies. U.S. Treasury yields rose. CONSUMERS ARE HUNTING FOR BARGAINS

Though Bank of America Institute's analysis of internal data suggested "no clear signs of households resorting to borrowing to support spending," it noted "some consumers are making more trips to the store, perhaps on ​the hunt for bargains." The tax filing season is over and a big chunk of the refunds has been depleted. Inflation has outpaced wage growth for the past two months and the saving rate dropped to a four-year low in April. A NerdWallet survey showed 35% ⁠of Americans said they would have to rely on credit this month to cover at least some of their expenses.

"Relying on credit to drive spending growth is not sustainable, not for households or the overall economy," said Elizabeth Renter, senior economist at NerdWallet. "If households are increasing their retail spending month after month, but relying on credit cards while under affordability constraints, the debt they're creating may become unmanageable." Sales at ⁠auto ​dealerships rebounded 1.2%. Sales at non-store retailers, which include online retailers, jumped 1.5%. Receipts at furniture stores increased 1.0%. There were increases in sales at health and personal care stores, clothing as well as sporting goods, hobby, musical instrument and book stores.

But receipts at food services and drinking places, the only services component in the report, dipped 0.1%. This category is considered a key measure of household finances. Sales at building material, garden equipment and supplies dealers were unchanged, as were those at food and beverage stores. Electronics and appliance store receipts fell 0.5%. Some economists saw the weakness in these categories as a sign of ⁠consumers growing more sensitive to prices.

Retail sales excluding automobiles, gasoline, building materials and food services increased 0.7% in May after advancing 0.5% in April. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product. For now, consumer spending, which accounts for more than two-thirds ⁠of the economy, appears to be accelerating after slowing in the first quarter. Growth ⁠prospects for this quarter were boosted by another report from the Census Bureau showing a solid increase in business inventories in April. The Atlanta Fed upgraded its second-quarter GDP growth estimate to a 3.0% annualized rate from a 2.8% pace prior to the data. The economy grew at a 1.6% pace last quarter.

"Survey data point to lean inventory across firms, while drawn-down oil inventories over the course of the war in Iran will need to be replenished in ‌the months ahead, which should mean the inventory cycle ‌is a bigger boost in the second half of the year," said Matthew Martin, a senior U.S. economist at Oxford Economics. "The potential wild card is trade policy uncertainty." (Reporting ​by Lucia Mutikani; Editing by Chizu Nomiyama, Nia Williams and Paul Simao)