Bloomberg News

WASHINGTON - Retail sales nationwide rose more than expected in June and a previously reported decline in May sales was revised to a gain, suggesting that the U.S. economy is not slowing as much as the Federal Reserve would like to see.

"Consumers have a lot of income, confidence is still fairly high, and now you have a stock market roaring back," said Chris Rupkey, a senior financial economist at Bank of Tokyo-Mitsubishi Ltd.

Retail sales rose 0.5% last month after a 0.3% increase in May that was first estimated as a 0.3% drop, the Commerce Department reported. Higher sales at auto dealers and gasoline stations - the latter partly a result of rising prices - led the June increase. Consumers remain optimistic, a rise in the University of Michigan's sentiment index for July showed today.

Though those figures suggest spending is not likely to slow much in coming months, another government report Friday indicated that inflation is not becoming a problem.

Prices paid to U.S. producers for goods other than food or energy products fell 0.1% in June, after a 0.2% increase in May, the Labor Department said. The decline suggests that higher oil and natural gas costs, which pushed up overall prices at the wholesale level by 0.6% last month, are not feeding through to other goods.

And output at U.S. factories, mines, and utilities rose in June at the slowest pace in nine months, Fed statistics showed. Industrial production increased a less-than-expected 0.2% last month after rising 0.5% in May, the Fed said. Increased output of automobiles, semiconductors, and business equipment was offset by slower demand for appliances, clothing, electricity, and steel.

The production report suggests "manufacturing output is starting to slow," said Christopher Low, chief economist at First Tennessee Capital Markets in New York. The June increase was the smallest since a similar gain in September 1999.

The tame inflation report could encourage Federal Reserve policymakers, who have pushed interest rates higher over the last year to keep inflation from accelerating. The production report could also reflect an expected cooling in consumer demand, though the retail sales figures will probably keep central bankers on alert for further signs that the economy is not slowing much.

In June, when policymakers decided to hold the overnight bank lending rate at its nine-year high, 6.5%, they warned that signs of a slowdown "are still tentative and preliminary." Trading in the federal funds futures contract for December on the Chicago Board of Trade suggests that investors expect the Fed to raise the overnight bank rate by another quarter percentage point by yearend.

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