CS Credit Suisse Group

U.S. retail sales rose solidly in May, the latest evidence of accelerating growth as the Federal Reserve considers the economic outlook amid a recent slowdown in hiring.

Led by increased spending online and at gas stations, retail sales climbed a seasonally adjusted 0.5% in May, the Commerce Department said Tuesday. The better-than-expected gain comes on the heels of April's 1.3% surge, which was the strongest advance in more than a year.

The latest data indicate consumer spending, which accounts for two-thirds of U.S. economic output, is healthy. A separate report from the Labor Department Tuesday showed prices for imported goods rose by the most since 2012, an indicator that inflation could be moving toward the Fed's 2% target.

Taken together, the latest numbers and recent soft jobs figures present a complicated picture to Fed officials who began a two-day policy meeting Tuesday. Stronger spending, modestly higher inflation, a solid housing market and low layoffs shows an economy that appears to be on decent footing. But the May jobs report showing that hiring fell sharply had several economists moving up their odds for a near-term recession and expecting Fed officials to strike a cautious tone when they announce their position on the economy and the benchmark short-term interest rate on Wednesday.

May's job gain of just 38,000, the weakest performance since September 2010, likely takes any rate increase off the table this week. But if the economy is accelerating and inflation is firming, that could give policy makers leeway to signal a rate increase could come in July—if the hiring picture improves and a U.K. vote over European Union membership doesn't rattle the stabilizing global economy.

"The conundrum for the Fed is they were proven right about weakness in the global economy and the stronger dollar—it was largely temporary," said Jeremy Lawson, chief economist at Standard Life Investments. "But they have to acknowledge the labor market is softer than anticipated."

The dichotomy leaves Fed Chairwoman Janet Yellen "to walk a tight rope" when she speaks Wednesday, he said, conveying both confidence in the expansion's longevity but patience on when the next rate increase could come.

The majority of economists surveyed by The Wall Street Journal earlier this month, after the latest jobs report, predicted a July increase in the Fed's benchmark rate. It would be the first increase since December. But the same survey put the odds of a recession in the next 12 months at 21%, about double what they were a year earlier.

Broader economic growth slowed in the first quarter to a 0.8% annualized advance. A stronger dollar hampered exports, falling oil prices caused the energy industry to halt investment and consumer-spending gains slowed. Each of those three factors turned the other direction this spring, pointing to a significant acceleration in growth.

And even the sour jobs report showed wages advanced at a stronger pace in May, up 2.5% from a year earlier. That should give consumers more ability to maintain strong spending.

After Tuesday's data, Credit Suisse raised its second-quarter projection for gross domestic product to a 3% advance from 2.8%. Macroeconomic Advisers lifted its growth projection to 2.6%. The Federal Reserve Bank of Atlanta forecast a 2.8% gain.

The retail-sales report "provides strong support to the view that U.S. growth is rebounding," Credit Suisse economist Jeremy Schwartz said. "The persistence of strong consumer spending suggests household fundamentals are not breaking down significantly."

Stronger spending comes alongside firmer inflation readings. Import prices rose 1.4% in April, the largest monthly gain since March 2012. The data, however, is not seasonally adjusted and in part reflects expected springtime increases for petroleum products.

The Fed's preferred inflation measure, the Commerce Department's personal consumption expenditure index, has remained below the Fed's 2% target for four years. But the gauge, up 1.1% in April from a year earlier, has generally trended higher for the past year.

Tuesday's retail report showed May's gain was led by a 1.3% gain in nonstore sales, which includes purchases on Amazon.com and its internet rivals. That category grew 12.2% from a year earlier. By comparison, department-store sales were down 5.8% from a year earlier.

"We had a big uptick in April and things went very well in May," said Matt Verbin, chief financial officer of Chandler, Ariz., online discounter Tanga.com LLC. He said the gains were better than expected given May's weak hiring.

Brick-and-mortar stores are suffering from lower mall foot traffic and limited selection, he said. Online retailers "can be more nimble and get the right product in front of the right customer."

Spending at gas stations increased 2.1% last month, and purchases of motor vehicles and parts rose 0.5%. But sales at general merchandise stores fell 0.3%, indicating spending remains somewhat uneven.

And previous upticks in consumer spending, including late last year, have been quickly followed by a slowdown. That's one factor why the seven-year-old expansion has failed to maintain a much better than a 2% growth pace.

The "data will show fuel prices down, interest rates are low, wages are up," Wal-Mart Stores Inc. Chief Financial Officer Brett Biggs said recently. "All of that says consumers should be doing fairly well, but there is still this underlying cautiousness." He blames that wariness to the long-lingering effects of the financial crisis.

Sarah Nassauer contributed to this article.

(END) Dow Jones Newswires

June 14, 2016 14:25 ET (18:25 GMT)

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