Retail sales pullback sparks concerns about recovery

Shoppers at a Target store in Brooklyn, New York.
Brendan McDermid | Reuters
Shoppers at a Target store in Brooklyn, New York.

American shoppers took a breather in June, producing an unexpected contraction in retail sales that has raised concerns that the U.S. economy may be hitting a soft spot.

The overall pace of sales in June fell 0.3 percent after a strong 1 percent jump in May. Economists had been expecting retail sales to rise by 0.2 percent last month.

June's spending pause was widespread with sales of cars, furniture, building material and clothing each off by more than 1 percent from May.

Other categories that had showed strength earlier this year—including miscellaneous store retailers, nonstore retailers, and food services and drinking places—also turned in a negative performance in June.

"This is not a good report," said IHS Global Insight consumer economist Chris Christopher. "Consumers are still cautious despite modest price inflation, relatively well-received employment reports and elevated levels of consumer confidence."

The report prompted IHS Global Insight to trim its forecast for second-quarter consumer spending growth by a half percentage point to 2.4 percent.

Since the surprise contraction in the first quarter—U.S. gross domestic product shrank by two-tenths of a percent in the first three months of the year—economists have been debating whether the slowdown represented a onetime, seasonal blip or a broader sign that the U.S. recovery is losing steam.

Some economists have also pointed to last month's employment report as a sign that the economy may be softening. While the economy added 223,000 net new jobs in June, and the jobless rate fell two percentage points to 5.3 percent, the government revised the data for prior two months downward by 60,000 jobs.

The report also said that average hourly wages—which had been posting gains earlier this year—were flat for the month.

Small-business owners are also concerned about the economy hitting a soft patch, according to a separate report Tuesday. The widely watched survey of U.S. small-business confidence fell last month to its lowest level in more than a year.

The National Federation of Independent Business said nine of the index's 10 components dropped in June and one was unchanged. Small-business owners reported weaker profit expectations and scaled-back hiring plans.

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"Taken literally, it suggests a sudden weakening in June, although that pattern is not being signaled by other data at all, so we are highly skeptical," said Jim O'Sullivan, chief U.S. economist at High Frequency Economics

O'Sullivan noted that there are few signs of economic slowdown in weekly reports on jobless claims and consumer confidence surveys.

Other analysts warned that it may be too soon to begin paring back forecasts based on one month's lackluster sales.

"We would be very wary of reading too much into the modest drop back in June," said Paul Ashworth, chief U.S. economist at Capital Economics. "The bottom line is that, despite the disappointing sales figures for June, second-quarter GDP growth was probably still close to 3.0 percent (on an annual basis)."

Uncertainty about the strength of the recovery continues to play a critical role in the debate among Federal Reserve policymakers over how soon to begin raising interests from historically low levels. The central bank has signaled it intends to begin gradually increasing the cost of borrowing, but investors remain intent on any clues the Fed offers on the timing.

Last Friday, Fed Chair Janet Yellen said she expected rates would begin rising "at some point later this year." Investors will be listening carefully for more clues when Yellen testifies before lawmakers on Wednesday and Thursday.