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WRAPUP 1-Surge in U.S. retail sales underscores economy's resilience

Lucia Mutikani

* Retail sales increase 0.7% in July

* Core retail sales jump 1.0%

* Weekly jobless claims rise 9,000 to 220,000

WASHINGTON, Aug 15 (Reuters) - U.S. retail sales surged in July as consumers bought a range of goods even as they cut back on motor vehicle purchases, which could help to assuage financial markets' fears that the economy was heading into recession.

The upbeat report from the Commerce Department on Thursday, however, will likely not change expectations that the Federal Reserve will cut interest rates again next month as the outlook for the economy continues to darken against the backdrop of trade tensions and slowing growth overseas.

A key part of the U.S. Treasury yield curve inverted on Wednesday for the first time since June 2007, triggering a stock market sell-off. An inverted Treasury yield curve is historically a reliable predictor of looming recessions.

Financial markets have fully priced in a 25-basis-point rate cut at the U.S. central bank's Sept. 17-18 policy meeting. The Fed lowered its short-term interest rate by a quarter point last month, citing the acrimonious U.S.-China trade war and slowing global economies. But the data could see markets dialing back expectations of a 50-basis-point rate cut next month.

Retail sales increased 0.7% last month after gaining 0.3% in June, the government said. Economists polled by Reuters had forecast retail sales would rise 0.3% in July. Compared to July last year, retail sales increased 3.4%.

Excluding automobiles, gasoline, building materials and food services, retail sales jumped 1.0% last month after advancing by an unrevised 0.7% in June. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.

U.S. stock index futures extended gains after the release of the data. U.S. Treasury yields rose while the dollar was slightly weaker against a basket of currencies.

STRONG CONSUMER SPENDING

July's gain in core retail sales suggested strong consumer spending early in the third quarter, though the pace will likely slow from the April-June quarter's robust 4.3% annualized rate. Consumer spending, which accounts for more than two-thirds of the economy, is being underpinned by the lowest unemployment rate in nearly half a century.

While a separate report from the Labor Department on Thursday showed an increase in the number of Americans filing applications for unemployment benefits last week, the trend in claims continued to point to a strong labor market.

Solid consumer spending is blunting some of the hit on the economy from a downturn in manufacturing, which is underscored by weak business investment.

Manufacturing's struggles were highlighted by a third report from the Labor Department showing productivity in the sector tumbled at its fastest pace in nearly two years in the second quarter, with factories cutting hours for workers.

The economy grew at a 2.1% rate in the second quarter, decelerating from the first quarter's 3.1% pace. Growth estimates for the third quarter are below a 2.0% rate.

In July, auto sales fell 0.6% after rising 0.3% in June. Receipts at service stations rebounded 1.8%, reflecting higher gasoline prices. Sales at building material stores gained 0.2%.

Receipts at clothing stores increased 0.8%. Online and mail-order retail sales jumped 2.8%, the most in six months, after rising 1.9% in June. They were likely boosted by Amazon.com Inc's Prime Day.

Receipts at furniture stores rose 0.3%. Sales at restaurants and bars accelerated 1.1%. But spending at hobby, musical instrument and book stores dropped 1.1% last month. (Reporting by Lucia Mutikani Editing by Paul Simao)