By Lucia Mutikani
WASHINGTON (Reuters) - U.S. retail sales surged in May as households boosted purchases of automobiles and a range of other goods even as they paid a bit more for gasoline, the latest sign economic growth is finally gathering steam.
While other data on Thursday showed a slight increase in new applications for unemployment benefits, the number remained in territory associated with a tightening labour market. The signs of a firming economy could likely prompt the Federal Reserve to raise interest rates in September.
"Today's data, including the trend-like jobless claims number, keep September firmly in place as a credible option for the Fed," said Anthony Karydakis, chief economic strategist at Miller Tabak in New York.
Retail sales increased 1.2 percent last month after an upwardly revised 0.2 percent gain in April, the Commerce Department said. April sales were previously reported to have been unchanged. March sales were also revised to show them rising 1.5 percent instead of 1.1 percent.
The dollar rallied against a basket of currencies on the retail sales data. Prices for U.S. government debt rose as lower European borrowing costs renewed appetite for Treasuries. U.S. stocks were trading higher.
The U.S. central bank has kept its short-term interest rate near zero since December 2008. Solid retail sales data added to robust job growth in May and stabilizing manufacturing activity in suggesting the economy was finding momentum after getting off to a slow start in the second quarter.
Retail sales excluding automobiles, gasoline, building materials and food services increased 0.7 percent last month after an upwardly revised 0.1 percent rise in April.
These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.
Economists had forecast core retail sales rising 0.5 percent after they were previously reported to have been flat in April.
March core retail sales were also revised up to show them increasing 0.9 percent instead of 0.5 percent.
GROWTH PICTURE BRIGHTENING
The government's most recent growth estimate showed gross domestic product contracted at a 0.7 percent annual pace in the first quarter.
But revisions to March core retail sales together with upbeat data on healthcare spending, as well as already reported revisions to construction spending, trade and wholesale inventory data suggest that output was probably not that weak.
"It is now possible that GDP didn't actually contract in the first quarter," said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.
Second-quarter GDP growth expectations were also boosted by a second report from the Commerce Department showing retail inventories, excluding autos, in April recorded their biggest increase since November 2013.
Consumer spending is likely to remain fairly strong in the coming months, supported by high savings, rising house prices and a tightening labour market, economists say.
In a separate report, the Labor Department said initial claims for state unemployment benefits increased 2,000 to a seasonally adjusted 279,000 for the week ended June 6.
It was the 14th straight week that claims held below the 300,000 threshold, which is usually associated with a firming labour market. The government reported last week that 280,000 jobs were created in May, up from 221,000 in April.
"We continue to expect robust consumption growth for the remainder of the year," said Laura Rosner, an economist at BNP Paribas (PARIS:BNPP) in New York.
Last month, overall retail sales were buoyed by a 2.0 percent jump in receipts at auto dealerships.
Sales at service stations rose 3.7 percent, reflecting a rise in gasoline prices. Sales at electronic and appliance stores gained 0.1 percent, while receipts at furniture stores increased 0.8 percent.
Sales at clothing stores surged 1.5 percent. Receipts at online stores climbed 1.4 percent and sales at sporting goods stores increased 0.8 percent. Sales of building materials and garden equipment advanced 2.1 percent.
Sales at restaurants and bars nudged up 0.1 percent.
