US industrial output data and retail sales buoy growth outlook

US retail sales rose more than expected in June as Americans bought motor vehicles and a variety of other goods, reinforcing views that economic growth picked up in the second quarter.The outlook was further supported by other data yesterday showing that industrial production recorded its biggest increase in 11 months in June on strong manufacturing and utilities output. With domestic demand strengthening, inflation is also steadily rising. The upbeat data and a rally on Wall Street could allow the Federal Reserve to raise interest rates later this year.“The Fed will welcome the continued strength in consumer spending and the latest positive jobs report, but it’s clearly in zero rush to tighten policy,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “These two reports might increase the odds of a September rate increase at the margin.”The Commerce Department said retail sales rose 0.6% last month after gaining 0.2% in May. It was the third straight month of increases and lifted sales 2.7% from a year ago. Excluding automobiles, gasoline, building materials and food services, retail sales shot up 0.5% after a similar gain in May. These so-called core retail sales correspond most closely with the consumer spending component in the gross domestic product report. Economists had forecast overall retail sales rising only 0.1% and core sales gaining 0.3% last month. In a separate report, the Fed said industrial output increased 0.6% last month, reversing May’s 0.3% drop. Manufacturing output rose 0.4% amid broad increases in production, including a 5.9% surge in auto assembly. Utilities output increased 2.4% and mining rose 0.2%. US stocks rose on the data, which helped to offset disappointing financial results from big banks. The dollar gained versus a basket of currencies, while prices for US government debt fell.Strong domestic demand is being reflected in steady increases in consumer prices. In a third report, the Labor Department said its Consumer Price Index rose 0.2% last month after a similar gain in May. In the 12 months through June, the CPI advanced 1.0%, matching May’s increase. The so-called core CPI, which strips out food and energy costs, also rose 0.2% in June, increasing by the same margin for three consecutive months. That lifted the year-on-year core CPI gain to 2.3% from 2.2% in May. This increase is higher than the average annual rate of 1.9% over the past 10 years. The Federal Reserve has a 2% inflation target and tracks an inflation measure which is currently at 1.6%.  Concerns about persistently low inflation contributed to the US central bank keeping interest rates unchanged last month. The Fed raised its benchmark overnight interest rate in December for the first time in nearly a decade.Yesterday’s reports came on the heels of a surge in job growth in June and an acceleration in manufacturing and services sectors activity. June’s strong rise in core retail sales could prompt economists to raise their second-quarter GDP growth estimates.The Atlanta Fed is currently forecasting second-quarter GDP growth at a 2.3% annualised rate. The economy grew at a 1.1% pace in the first three months of the year. Retail sales will likely remain supported in the wake of a rally on the US stock market, rising wages and higher savings.Retail sales in June were buoyed by purchases of building materials and garden equipment, which jumped 3.9%, the largest increase since April 2010. Online retail sales rose 1.1%, while receipts at sporting goods and hobby stores shot up 0.8%. There was also a boost from furniture sales, which rose 0.5%. Auto sales edged up 0.1% after declining 0.5% in May. Americans also spent more on grooming and paid more for gasoline, but cut back on apparel purchases and spending at restaurants.