U.S. retail sales fell sharply last month, dragged down largely by automobile sales that plunged as major automakers tried unsuccessfully to curb incentives.
Overall retail sales dropped 1.1 percent in June, the biggest dive in 16 months, following a 1.4 percent gain in May, the Commerce Department reported yesterday.
Even after excluding autos, retail sales fell 0.2 percent last month after rising 0.9 percent the previous month, the report showed, providing another sign that the U.S. economy has cooled slightly in recent months amid rising prices and interest rates, analysts said.
"Consumers are suddenly discovering they have less money in their pockets, and they are wary," said Kurt Barnard, president of Barnard's Retail Consulting Group. "That is not likely to change anytime soon."
Auto sales plummeted 4.3 percent, as several U.S. automakers trimmed the big cash and financing incentives that had successfully spurred sales in recent years. Buyers balked at the higher prices, the report showed.
General Motors Corp., whose sales account for 27 percent of the U.S. car market, reduced incentives by an average of $300 per vehicle in June, from about $4,300 to $4,000, according to Autodata Corp., an industry consulting firm. The carmaker's sales tumbled 15 percent for the month.
"Consumers expect there to be incentives, so when there aren't, they will not buy a car," said David Lucas, vice president at Autodata.
John Smith, GM's vice president of North America sales, called the figures "weaker than we expected." At Ford Motor Co., whose brands include Volvo and Land Rover, sales fell 8 percent in June from June 2003, though the company did not lower incentives.
To boost sales, GM and Ford raised incentives in July. Ford raised its highest incentives from $4,000 to $5,000. GM said it increased incentives on 2004 trucks and sport-utility vehicles to $5,000, from $4,000. Both are offering no-interest loans.
The higher incentives could not come soon enough for Vincent A. Sheehy, president of Sheehy Auto Stores, which owns 12 dealerships in Maryland and Virginia. With incentives cut, sales of domestic autos on Sheehy's lots fell 10 percent in June.
"Incentives drive our business," he said. "When the manufacturers ease off the pedal, our sales slow up."
Sales also fell last month at clothing stores, department stores, and food and beverage stores, and in the category that includes restaurants and bars, the report showed.
The retail sales report followed others indicating that economic growth slowed a bit in the April-June period, as household and business spending were crimped by rising interest rates and higher prices for gasoline, food and many other items. Employers slowed the pace of hiring in each of the past three months; new orders to U.S. factories dropped in April and May; manufacturing activity rose in June at a slower pace than in May.
Several analysts now estimate that the economy grew at an annual rate between 3.5 percent and 3.8 percent in the second quarter -- a healthy pace, but slower than that of the previous three quarters.
A slightly cooler rate of economic expansion would ease inflation concerns and make it easier for the Federal Reserve to stick to its plan of raising short-term interest rates gradually in coming months. But if growth drops too much, the Fed could stop raising rates or even cut them again to prevent the recovery from stalling.
Housing sales soared in the spring as Fed officials made clear they would start raising rates soon. In fact, some of the strongest gains evident in the June retail sales report appeared in categories related to the home: Furniture and home furnishing sales rose 1.1 percent, while electronics and appliance sales rose 0.5 percent.
"The pie is only so big," Barnard said. "People are making trade-offs, and they are choosing the home."
The retail sales figures suggest "the housing market remains a key factor of economic growth," Drew Matus of Lehman Brothers Global Economics wrote in a note to clients yesterday. "As such, the Fed is likely to remain cautious with regard to rate increases."