KEY DATA: Sales: +0.3%; Excluding Vehicle: +0.1%/Non-Fuel Import Prices: 0%; Farm Export Prices: +0.5%/Jobless Claims: 317,000 (up 4,000)

IN A NUTSHELL:  “Consumers are out shopping but maybe not as much as hoped.”

WHAT IT MEANS: Households spent money in May but they were  hardly irrationally exuberant with their purchases.  Retail sales rose moderately but that came on top of an upward revision to the April gains so this report is somewhat better than it appears on the surface, or if you only looked at the headline number.  Robust gains in vehicle sales were expected to push total retail demand up more sharply but that was based on a modest rise that was initially estimated for April.  The previous month’s increase is now put at a very respectable 0.5% pace, not a mediocre 0.1% rise.  So far this quarter, retail sales are rising very solidly.  Outside the expected jump in vehicle demand, the rest of the report was a bit strange.  There were solid increases in furniture, building supplies and Internet retailers but weakness in electronics and appliances, clothing, department stores and food.   So it is unclear what people are thinking when they go out to shop.

On the inflation front, import prices remain pretty tame, especially when you exclude fuel.  We are beginning to see the pressure on food costs easing, which is good news for consumers.  Imported capital goods prices did tick up, but there is not a lot of pressure there, which is also the case with consumer goods.  On the export side, farmers are beginning to get some more money for their products, which is good news for the agricultural sector.

As for the labor market, jobless claims rose a touch but the level remains low enough that we are likely to see another very solid job gain when the June employment data are released.  We could also see the unemployment rate ease as well.

MARKETS AND FED POLICY IMPLICATIONS: We are having a spring rebound though it may not be quite as robust as we had hoped.  Consumer spending is clearly rising and another decent gain in June would cement the belief that households are once again playing their part in the recovery.  What will propel things faster, though, is some pay increases.  That seems to be coming as the low level of unemployment claims points to further tightening in the labor market.  But we are months away from the point where businesses will realize that conditions have turned.  After having dismissed worker compensation from their minds for so long, it may take a crisis before many executives recognize they have a real problem on their hands.  As for the markets, this should be a largely non-event.  With international issues playing a part in trader thinking, I suspect not much will be made of any of the reports released today.