by Calculated Risk on 2/14/2006 01:20:00 PM

Bloomberg reports: Retail Sales May Spur Faster Expansion

Retailers rang up their biggest sales gains since May 2004 last month, more than doubling forecasts and helping the U.S. economy snap back from its worst quarter in three years.

The 2.3 percent rise came as the warmest January in more than a century encouraged Americans to buy more cars and redeem holiday gift cards. The gain followed a 0.4 percent increase in December, the Commerce Department said today in Washington. Excluding autos, sales rose 2.2 percent, the most in six years.

The fifth straight increase in sales reflects the higher wages U.S. workers are enjoying as the economy adds more jobs and unemployment declines. Treasury notes fell on speculation the economic rebound will give Federal Reserve Chairman Ben Bernanke more reason to raise interest rates next month.

"We're definitely going to see a very strong first quarter," said Brian Bethune, an economist at Global Insight Inc., a forecasting firm in Lexington, Massachusetts. "It looked like consumers were hibernating in December, and all they needed was an excuse to go on a spending spree. The weather provided that."

Economists expected sales to rise 0.9 percent, after an originally reported 0.7 percent gain in December, according to the median of 71 forecasts in a Bloomberg News survey. The rise exceeded the highest estimate of 1.5 percent.

"There's no question it's exaggerated by the record mild temperatures in January," said Jim O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. "We expect some payback" for February, he said.

I'm not really surprised. The weather has been nice and mortgage activity is still robust. With the recent increases in the Ten Year yield, I expect mortgage rates to increase this week. It will be interesting to see if higher rates slow mortgage activity (the MBA report is due tomorrow).

And it looks like rates are even going higher. Based on the FED funds futures, the market is now expecting at least two more rate hikes (See Macroblog: Betting On Ben, Market Version)

For more on retail, see Kash's Consumption: Full Steam Ahead