US retail strength eases slowdown fears

US retail sales showed surprising vigour in March, official figures showed today, easing fears of a slowdown in the world's largest economy.

In their strongest showing since autumn 2001, retail purchases jumped 2.1% last month, well above Wall Street expectations. In other reassuring news, the slide in sales in February was revised to a less severe 1.3% from the previously reported 1.6%.

Much of the strength came from a 5.3% increase in car sales on the back of favourable financial terms and other incentives.

Meanwhile, US consumer confidence rebounded this month as US and British forces swept aside Iraqi troops. The University of Michigan's preliminary consumer sentiment index jumped to 83.2 this month from a reading of 77.6 in March, which was the lowest since August 1993.

Investors had waited nervously for the latest economic news as recent data had indicated that the US economy was stalling. As retail sales make up a substantial portion of overall consumer spending, which accounts for two-thirds of US economic activity, today's figures came under close scrutiny.

With the jobs market in the doldrums in recent months, economists fear that consumers might react by cutting back spending, putting more pressure on an already fragile US economy. For some analysts the US economy is so weak that it stands on the cusp of recession.

While today's data reassured the markets, America's chief executives remain largely downbeat about the economy's prospects in the months ahead, according to the Business Roundtable, a big business advocacy group.

"CEOs identified their greatest economic challenges as consumer uncertainty resulting from the implications of war with Iraq and terrorism, and weak consumer demand," John Dillon, chairman of group, said yesterday.

Even with signs that the war in Iraq may be winding down, Mr Dillon said executives were still concerned about how long it will take for the economy to fully recover from the 2001 recession.

Economists believe that the US economy is still suffering from the excesses of the 1990s, when companies over-invested heavily in anticipation of future growth. When the bubble burst, companies found themselves saddled with large amounts of debt and capital equipment.

With the end of the bubble, "expectations of future growth were revised substantially lower", HSBC said in a research note, "leaving the level of the capital stock too high relative to the new, lower, expectations of future growth. To make matters worse, the plunge in equity values released a negative wealth effect that reduced demand even further, exacerbating the excess supply condition."