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Modest rise in retail sales offers cautionary note

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WASHINGTON (Reuters) - Retail sales rose less than expected in June, the latest sign of a slowdown in economic growth that could argue against the Federal Reserve's plan to start trimming its monetary stimulus later this year.

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While other data on Monday showed factory activity in New York state accelerated in July, overall manufacturing remains lackluster.

"It provides no additional evidence that the economy is gaining momentum," said Annalisa Piazza, a senior economist at Newedge Strategy in New York. "It doesn't allow the Fed's chairman to have a firmer tone as the economic recovery remains gradual."

Retail sales increased 0.4 percent last month, lifted by demand for automobiles and higher gasoline prices. However, sales of building materials fell by the most in a year, a potentially worrying sign for the housing market.

Households also spent less on electronics and cut back on trips to restaurants and bars.

Retail sales had increased 0.5 percent in May.

Economists polled by Reuters had forecast retail sales, which account for about 30 percent of consumer spending, rising 0.8 percent in June.

So-called core sales, which strip out automobiles, gasoline and building materials and correspond most closely with the consumer spending component of gross domestic product, edged up 0.1 percent after rising 0.2 percent in May.

It suggested that consumer spending, which accounts for about 70 percent of economic activity, probably slowed sharply from the first quarter's 2.6 percent annual pace.

Stocks were little changed in morning trade. U.S. Treasury debt price erased earlier losses, while the dollar rose against the euro and the yen.

SLOWER CONSUMER SPENDING

 

The suggestion of slower domestic demand as well as recent weak trade data comes as the Fed is debating cutting back the $85 billion in bonds it is purchasing each month to keep borrowing costs low and stimulate the economy.

Fed Chairman Ben Bernanke said last month the central bank would start tapering its purchases later this year and would likely bring the program to a complete close by the mid-2014 if the economy progressed as it expected.

But he has since stressed that the Fed needed to keep a stimulative monetary policy in place given the low level of inflation and a still-high unemployment rate. Bernanke will testify to congress on the economy later this week.

A second report from the Commerce Department showed business inventories barely rose in May, suggesting restocking will be less of a boost to growth in the second quarter.

The slowdown in growth mostly centered around consumer spending, trade, inventories and manufacturing. But there are hopeful signs for the factory sector.

A separate report showed the New York Fed's "Empire State" general business conditions index rose to 9.46 this month from 7.84 in June. A reading above zero indicates expansion in the region's factories.

The survey's measure of new orders rebounded into positive territory, while gauges of employment improved.

A brightening labor market picture is helping to support spending. Last month, receipts at auto dealerships rose 1.8 percent after advancing 1.4 percent the prior month. Excluding autos, sales were flat after rising 0.3 percent the prior month.

Sales at building materials and garden equipment suppliers fell 2.2 percent, the weakest reading since May last year.

(Reporting by Lucia Mutikani; Additional reporting by Richard Leong in New York; Editing by Andrea Ricci)

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