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Solid U.S. retail sales boost economic outlook

People attend a job training and resource fair at Coney Island in New York December 11, 2013. REUTERS/Eric Thayer
People attend a job training and resource fair at Coney Island in New York December 11, 2013. REUTERS/Eric Thayer

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. retail sales rose solidly in November, adding to signs of a strengthening economy that could draw the Federal Reserve closer to reducing the pace of monetary stimulus.

The upbeat picture was clouded somewhat by other data on Thursday showing the biggest jump in a year in first-time claims for jobless benefits. Economists, however, largely dismissed that report as skewed by a late Thanksgiving and other factors.

The Commerce Department said retail sales increased 0.7 percent last month as Americans stepped up spending on a wide range of goods from automobiles to electronics. November's increase was the largest in five months and followed a 0.6 percent rise in October.

"It should provide more confidence to the Fed that the economic recovery has emerged from the political-induced uncertainties of recent months essentially unscathed and reinforce the expectation for the recent improved performance in the data to be sustained," said Millan Mulraine, senior economist at TD Securities in New York.

Economists polled by Reuters had forecast retail sales advancing 0.6 percent last month.

So-called core sales, which strip out automobiles, food services, gasoline and building materials and correspond most closely with the consumer spending component of gross domestic product, rose 0.5 percent after gaining 0.7 percent in October.

The core sales gain was consistent with consumer spending rising at an annualized rate of at least 3.5 percent in the fourth quarter, economists said. That would be a big step-up from the third quarter's 1.4 percent pace.

"There are signs of an earlier pick-up in consumption that is also likely to be the heart and soul of a future growth acceleration," said Alan Ruskin, head of currency strategy at Deutsche Bank Securities in New York.

U.S. stocks were trading lower as investors' attention remained focused on next week's Fed policy meeting. U.S. government bond prices fell, while the dollar rose against a basket of currencies.

INVENTORY BUILDING CONTINUES

The relatively strong sales last month defied industry expectations of a slow holiday season. Reports early this month suggested shoppers spent less during the Thanksgiving weekend, the traditional start of the holiday shopping season.

Middle-income shoppers have been careful in their spending, waiting for the right promotions and in many cases shifting a lot of their spending to big-ticket items like their cars or home repairs and away from items such as clothing.

Home improvement chains Home Depot and Lowe's Inc last quarter reported far better sales gains than chains such as Macy's Inc or Target Corp.

Spending is being supported by solid job gains and steady income increases, and could help shield the economy in the fourth quarter from an expected effort by businesses to reduce inventories that piled up during the July-September quarter.

The data prompted economists to raise their fourth-quarter GDP growth estimates by as much as half a percentage point to as high as a 2.2 percent annual rate.

Economists also said a second report from the Commerce Department suggested businesses were not being as aggressive in selling off inventories as had been expected, which could mean any correction spills into the new year.

Inventories increased 0.7 percent in October, the largest gain in nine months, after a 0.6 percent rise in September.

Lower gasoline prices are also helping, though they were a drag on the retail sales figures, which are not adjusted for inflation.

The firming growth tone was tempered somewhat by a report from the Labor Department that showed initial claims for state unemployment benefits surged 68,000 to a seasonally adjusted 368,000 last week.

That was the largest weekly increase since November 2012 and surpassed economists' expectations for a rise to only 320,000.

However, the four-week moving average for new claims, which irons out week-to-week volatility, rose only 6,000, suggesting that a recent strengthening of the jobs market remains intact.

"Through the volatility, the trend in claims is likely still flat-to-down, consistent with no let-up from the recent solid pace in payrolls," said Jim O'Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York.

Nonfarm payrolls increased strongly in October and November, and the jobless rate hit a five-year low of 7.0 percent.

The steady stream of fairly upbeat data should give the Fed cover to start cutting back its monthly $85 billion bond buying program soon, and could fuel some speculation a move could come as early as the central bank's meeting on Tuesday and Wednesday.

(Reporting by Lucia Mutikani; Additional reporting by Phil Wahba; Editing by Andrea Ricci)

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