By Lucia Mutikani
WASHINGTON (Reuters) - U.S. retail sales recorded their largest gain in 1-1/2 years in March in a decisive sign the economy is bouncing back from its weather-induced slumber.
Monday's upbeat report was the latest to indicate growth was set to accelerate in the second quarter after an unusually cold and snowy winter hobbled activity early in the year.
"It shows there is an underlying current of strength in the economy despite the drag from the severe winter weather," said Robert Dye, chief economist at Comerica in Dallas.
The Commerce Department said retail sales increased 1.1 percent last month, the biggest gain since September 2012, with receipts rising in nearly all categories.
February's increase was raised to 0.7 percent from a previously reported 0.3 percent. Economists had expected retail sales, which account for a third of consumer spending, to advance only 0.8 percent last month.
The data combined with an improvement in quarterly profits from Citigroup to lift stocks on Wall Street after a sharp selloff in recent sessions. The dollar rose against a basket of currencies, while prices for U.S. Treasury debt fell.
The sales figures added to recent employment data in suggesting the economy found momentum at the end of the first quarter. Job growth averaged 195,000 per month in February and March, an improvement over the prior two months, and first-time applications for unemployment benefits in early April fell back to their pre-recession level.
These bullish signals have bolstered hopes that growth this year will be the fastest since the 2007-09 recession ended.
"This is not a fragile economy. The linchpin of economic growth, the consumer is back and with the consumer's help, growth will be even faster in 2014," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.
A separate report from the New York Fed released on Monday showed people grew more confident in the labor market last month, with younger workers in particular seeing a greater chance of finding work should they lose their current job.
ON SOLID FOOTING
The retail sales data led some economists to bump up first-quarter GDP growth estimates briefly, before they scrambled to lower them after a separate Commerce Department report showed retail inventories, excluding automobiles, rose only 0.2 percent in February after increasing 0.6 percent in January.
Businesses accumulated too much stock in the second half of last year and are placing fewer orders with manufacturers as they work through the pile of unsold goods.
That has left the inventory to sales ratio at its highest level since September 2009. But with consumers showing an appetite to spend, thanks to improving household wealth, businesses should be able to reduce their bloated stocks.
First-quarter gross domestic product growth estimates now range as low as a 0.5 percent annual pace. Many economists, however, expect growth of around a 3 percent rate in the second quarter and through the rest of the year.
So-called core retail sales, which strip out automobiles, gasoline, building materials and food services, and which correspond most closely with the consumer spending component of the government's GDP report, increased 0.8 percent in March.
February's core sales were revised to show a 0.4 percent rise instead of the previously reported 0.3 percent gain.
Nevertheless, consumer spending likely slowed sharply in the first quarter from the fourth quarter's brisk 3.3 percent pace as core sales fell in January.
Retail sales last month were buoyed by a 3.1 percent surge in receipts at automobile and parts dealers, the biggest advance since September 2012. Still, even excluding autos, sales rose 0.7 percent, the biggest increase in a year.
Sales at building materials and garden equipment stores recorded their largest gain in eight months. The share price of home improvement chain Lowe's was up about 1 percent on Monday, outperforming the broader market.
Receipts at electronics and appliance stores, however, fell as did sales at gasoline stations. Retail sales excluding gasoline increased a solid 1.4 percent, the biggest advance in four years.
There were gains in sales at furniture, clothing, general merchandise, health and personal care, food and beverage, sporting goods, restaurants and nonstore retailers.
(Reporting by Lucia Mutikani; Editing by Andrea Ricci)