Surprise Retail Sales Gain Lifts Market Despite Sluggish Discretionary Spending

Retail sales unexpectedly rose 0.3% last month after a dismal December, the Commerce Department said Wednesday, easing concerns that the U.S. already has fallen into a recession.

Wall Street cheered the report. The Nasdaq rose 2.3% while the S&P 500 and Dow climbed 1.4%.

Analysts had expected a 0.3% fall following December's 0.4% drop.

Consumer spending, which accounts for 70% of economic activity, is being eyed closely for signs the U.S. is sliding into a recession.

"As the consumer goes, so goes the economy," said Joel Naroff. chief economist at Naroff Economic Advisors. "The good news is that the consumer is not dramatically cutting back on spending, but the bad news is the consumer is not spending at any great pace."

Some of the report's details raised eyebrows among economists.

Sales at auto dealers and parts stores rose 0.6%, Commerce said. But the automakers' own reports showed a 5.6% drop in overall unit sales last month to 15.3 million.

Gasoline station sales rose 2%, largely reflecting higher prices. Yet most reports show prices at the pump edging lower in 2008.

Retail sales excluding autos and gasoline were flat. Year over year, they rose just 2.6%, the smallest gain in almost five years.

If consumer spending doesn't continue to grow at a moderate pace, says Naroff, the economy likely will see at least one negative quarter in 2008.

Analysts anticipate consumer demand probably will wane in the coming months.

Discretionary spending was weak in January. Department store sales fell 1.1%. Macy's (NYSE:M - News), Target (NYSE:TGT - News) and Limited Brands (NYSE:LTD - News) all said same-store sales declined last month.

Consumers reined in big-ticket purchases. Electronics sales slid 1% after December's 3.2% dive. Furniture sales fell 0.5%, their sixth straight decline.

Apparel was a bright spot in January, soaring 1.4%. But sales fell 2.3% in December. And clothing is down vs. a year earlier.

Building material sales fell for the fifth time in six months.

Americans also went out to eat less last month -- maybe because they are shelling out more at grocery stores as food prices soar.

Brian Bethume, an economist at Global Insight, says the report amplifies the impact the housing market is having on consumer spending and the economy as a whole.

"Housing has become a more visible drag on GDP growth, and it could push the economy into a contractionary mode," Bethume said.

Federal Reserve chief Ben Bernanke will testify Thursday before the Senate Banking Committee.

Several of his colleagues have talked more openly in February about the risks of recession.

Futures traders are pricing in at least a 50-basis-point 18ate cut by the Fed's March meeting.