By Harriet Torry, Mike Cherney and Min Zeng 

U.S. consumers showed signs of strength in January, taking advantage of low oil prices to increase their spending and offering a welcome counterpoint to the gloom that has gripped investors and roiled markets since the start of the year.

Sales at retail stores and restaurants rose 0.2% in January from the prior month, the Commerce Department said Friday. And December's retail sales were revised to a 0.2% gain instead of a drop, showing a better end to the year than initially estimated.

The increase offers hope that the U.S. economy, which rests heavily on consumer outlays, can buck a slowdown in the global economy and power through a downturn in manufacturing. Investors cheered, sending the Dow Jones Industrial Average up 313.66 points, or 2%, to 15973.84 in the largest gain this month; it remains down 8.3% for the year.

The retail-sales gains bolster a case that many analysts and economists have been making in recent weeks: While many financial-market gauges are raising concern about the health of the economy, ranging from the decline this year of broad stock indexes to the rise in corporate borrowing costs, direct measures of economic health such as home sales, employment and wages have been sending largely upbeat signals, suggesting that a U.S. expansion wrapping up its seventh year may not be as vulnerable as some fear.

Markets are forecasting a U.S. recession, "but I don't see that," said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. "U.S. labor markets are still in good shape and we just started to see some wage pressure."

The retail news helped fuel a broad rally in financial markets Friday. U.S. crude oil rose 12.3% to $29.44 a barrel, its biggest one-day percentage gain since 2009. Prices are still down more than 20% this year.

Bank stocks, hit hard this year by declining global-growth expectations and fears that the negative-interest-rate policy adopted Jan. 29 in Japan points to a future of constrained profits, surged Friday. J.P. Morgan Chase & Co. rose 8.3%, Bank of America Corp. rallied 7.1% and Morgan Stanley added 6.5%. The KBW Nasdaq Bank Index of large U.S. commercial lenders rose 5.4% Friday but is down 19% for 2016.

For now, investors have been struggling to divine the relationship between falling oil prices and the broader market. Once thought an unalloyed good for the U.S. economy, the roughly 70% plunge in crude prices since 2014 has instead roiled markets by upending a major source of U.S. investment spending and employment.

As well, consumers and businesses appear to be displaying considerable caution with energy savings, moving carefully on outlays and saving wherever possible.

Indeed, the improvement in retail sales, while solid, remains far from spectacular after a plunge in gasoline prices that many economists expected would result in a surge in consumer spending.

Investors since have been scrounging for signs that low pump prices are spurring U.S. consumers to spend more at restaurants, retailers and elsewhere. Vasant Prabhu, the chief financial officer at payments firm Visa Inc., said Tuesday that evidence of increased spending has been "spotty," but he still gave some cause for optimism.

"Consumers are now beginning to believe that these gas prices could stay low for longer, which would suggest that they may feel better about spending some of those savings," he said at the Goldman Sachs Technology and Internet Conference.

Spending by consumers drives two-thirds of U.S. economic output, and household outlays have helped the economy grow in recent quarters despite a strong dollar and weak overseas growth, which have burdened U.S. exporters.

Consumers continued to spend less at gas stations thanks to lower fuel prices. But a core measure of retail sales excluding autos and gasoline posted a 0.4% increase. Americans stepped up spending across several major categories, including vehicles, groceries and building materials. Compared with a year earlier, sales grew 3.4%.

With December's revision to retail sales, January marked the fourth consecutive month of gains and showed how American households remain relatively strong. "Despite the ongoing turmoil in global financial markets, consumer spending still managed to get off to a firm start" to the first quarter, said Richard Moody, chief economist at Regions Financial Corp.

The impact of a major snowstorm in the Northeast in January was less than feared, economists said. Wages rose and unemployment fell in the first month of the year, the Labor Department said last week, providing a strong foundation for spending growth.

While consumers appeared undeterred by the volatility in January, a sentiment reading out Friday indicated shoppers may be growing more nervous this month. The University of Michigan's preliminary February sentiment index dropped to 90.7 from 92.0 in January, which the surveyors attributed to a less favorable outlook for the economy this year.

That could point to caution in the months ahead, economists warned. Given financial-market uncertainty, growth in consumer outlays will remain contingent on the job market remaining strong and wages growing further.

Companies have also warned about the impact of market jitters on shoppers recently. A number of companies that reported quarterly earnings this past week referred to the turbulent macroeconomic backdrop, but they said it has yet to have a pronounced impact on their bottom line.

At Interpublic Group of Cos., Chief Executive Michael Roth said advertisers haven't yet made significant changes to their ad spending despite the precarious environment.

"The uncertainty we're all experiencing leads us to approach the new year with a degree of caution," Mr. Roth said on the company's earnings call Friday.

Expedia Inc. Chief Executive Dara Khosrowshahi said during an earnings call this past week that some corporate clients are trying to save money by downgrading "from premium class to economy class or taking a train instead of taking a plane."

Nonetheless, Friday's reading on retail sales suggests consumers headed into 2016 on a relatively strong footing, welcome news for a Federal Reserve looking for evidence the U.S. economy is holding steady amid global uncertainty.

In a speech Friday, Federal Reserve Bank of New York President William Dudley described households as "in good shape." He said households look "much better positioned today than in 2008 to absorb shocks and continue to contribute to the economic expansion."

Write to Harriet Torry at harriet.torry@wsj.com

 

(END) Dow Jones Newswires

February 12, 2016 19:05 ET (00:05 GMT)

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