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NEW YORK -- Retail sales in January had been expected to rise a much stronger 0.8 percent based on earlier reported indications of unit auto sales jumping 4.4 percent in the month, said Paul Ferley, assistant chief economist for RBC Economics Researcy.

However, in today’s report, sales at motor vehicle dealers unexpectedly fell 1.1 percent. This suggests that a significant component of the unit sales gain represented fleet sales that will be captured in the business investment component of GDP rather than consumer spending, he added.

Excluding the auto component, retail sales rose a solid 0.7 percent and compares to expectations of a 0.5 percent gain. Some of this strength was the result of higher gasoline prices sending gas station receipts up an expected 1.4 percent in the month; however, excluding both the gasoline and auto components, sales rose a stronger than expected 0.6 percent, said Ferley.

This more than reversed the 0.2 percent drop recorded in December 2011, which represented a downward revision from unchanged activity previously estimated, he explained.

In compiling the consumer spending measure for GDP purposes, a measure of retail sales that excludes not only the volatile auto and gas components but also building materials is used. This measure encouragingly rose a solid 0.7 percent in the month although this followed a downwardly revised 0.6 percent drop in January that had been previously estimated as down 0.3 percent, said Ferley.

The downward revision to this December gain will likely contribute to annualized growth in the volume of fourth-quarter 2011 consumer spending being revised down to 1.8 percent from an initially estimated 2.0 percent.

"This will temper indications of greater strength in construction, trade, and inventories although not prevent a likely upward revision to fourth-quarter 2011 GDP growth to 3.0 percent from the first estimate of a 2.8 percent gain," said Ferley. "The recovery in this component of retail sales in January augurs well for a first-quarter 2012 gain in consumer spending of 2.0 percent.

"The rise in growth in January retail sales after unchanged activity in December is encouraging and suggests that rising employment is providing the means for households to increase purchases," said Ferley. "In fact, the data are consistent with some modest improvement in the volume of consumer spending in the first quarter of 2012 relative to the fourth quarter of 2011.

"The implied pace of growth, however, remains moderate by historical standards and offers limited promise of providing significant further downward pressure on the unemployment rate," he added. "To help sustain an even faster improvement in labor markets, the Fed is expected to maintain highly accommodative monetary conditions with the Fed funds being held unchanged in the range of 0 percent to 0.25 percent and with additional asset purchases still likely."

SOURCE: RBC Economics Research press release