By Lucia Mutikani, Washington | Wednesday, April 13, 2011, 7:08 AM CEST Washington (Reuters) - U.S. retail sales reported their smallest gain in nine months in March as auto sales plunged and consumers felt the sting of higher gas prices. In another sign that economic growth slowed in the first quarter, the government on Wednesday separately reported a sharp decline in business inventory accumulation in February. Economists, who have consistently been lowering growth forecasts as first-quarter data has come in, are quickly cutting them again. Nonetheless, they expect the recovery to gain momentum later this year.
"The recovery and spending in the first quarter has been a bit of a disappointment, partly because of energy prices, and we're going to limp through this (second) quarter," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania.
Retail sales rose 0.4 percent in March, the Commerce Department said on Wednesday. Excluding gasoline, retail sales were up a meager 0.1 percent.
Economists now see first-quarter GDP growth as low as 1.4 percent annualized. At the start of the year, many economists expected a pace of around 3.5 percent. The economy grew at a 3.1 percent rate in the final three months of 2010.
Business inventories, an important component of GDP, imply slower production with less restocking taking place.
Gasoline price increases for the bulk of retail sales in March were a major factor holding back growth. Bad weather early in the year and a still weak labor market also weighed on the economy.
"The forces restraining real GDP growth in the first quarter will prove transitory," said Dean Maki, chief U.S. economist at Barclays Capital in New York. "Other key indicators of activity are all moving in a manner consistent with strong, not weak, economic growth."
Companies are beginning to feel the pinch of high energy prices, a Federal Reserve Beige Book report showed on Wednesday.
In a summary of economic conditions, the U.S. central bank said the economy continued to improve last month but higher raw material costs were reported to be putting upward pressure on prices.
Expensive gasoline is boosting receipts at gas stations, which account for about one-tenth of total retail sales. Sales at gas stations rose 2.6 percent last month after increasing 2.4 percent in February.
Gasoline averaged $3.62 per gallon last month, up 35 cents from February. The U.S. Energy Information Administration warned on Tuesday that prices could rise to about $4 per gallon nationwide this summer.
Upward revisions to January and February sales data took some of the sting out of the report, leaving consumer spending growth tracking at about a 2 percent rate in the first quarter, according to economists.
Consumer spending, which makes up 70 percent of U.S. economic activity, grew at a robust 4 percent pace in the final three months of last year.
In a separate report, the Commerce Department said business inventories rose 0.5 percent in February after advancing 1.0 percent in January. Businesses sharply scaled back on restocking in the fourth quarter of 2010, which sliced 3.4 percentage points off GDP growth during that period.
Economists had expected faster restocking to help lift growth at the start of this year, but the February data tempered their expectations. The reports had little impact on financial markets. On Wall Street, the Dow industrials .DJI and the Standard & Poor's 500 index .SPX were each down 0.1 percent after gaining on strong profit growth at JPMorgan Chase & Co (JPM.N), which dramatically cut the amount of money it set aside for bad loans.
However, the Nasdaq .IXIC was down 0.6 percent, buoyed by advances in tech shares.
A 1.7 percent drop in auto sales weighed on March retail figures. Excluding autos, sales rose 0.8 percent.
Elsewhere, clothing store revenues increased 0.6 percent last month while sporting goods, hobby, book, and music store sales edged up 0.1 percent.
Despite being squeezed by high gas prices, consumers splurged on furniture — recording the largest gain since July 2004 — and on electronics and appliances. Sales of building materials and garden equipment were also solid.
"It seems to us that people are maintaining their spending in the face of higher gas prices with their savings," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.
So-called core retail sales — which exclude autos, gasoline, and building materials — rose 0.4 percent after a 1.1 percent increase in February. Core sales correspond most closely to the consumer spending component of the government's GDP report.
(Edited by Leslie Adler and Jan Paschal)
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