WASHINGTON (Reuters) - U.S. retail sales unexpectedly fell in February, but a rebound in factory activity in March and strong increase in construction spending offered hope the economy was not slowing as sharply as previously feared.

FILE PHOTO: People shop at Macy's Department store in New York City, U.S., March 11, 2019. REUTERS/Brendan McDermid/File Photo

The mixed reports on Monday prompted economists to raise their growth projections for the first quarter. Still, the economy’s improving prospects were not expected to have any impact on the Federal Reserve’s decision last month to abruptly end its three-year campaign to tighten monetary policy.

The U.S. central bank abandoned projections for any interest rate hikes this year after increasing borrowing costs four times in 2018, acknowledging rising headwinds, including a fading stimulus from $1.5 trillion in tax cuts, trade wars, slowing global growth and uncertainty over Britain’s exit from the European Union.

“The economic downslide may be over but there are no clear indications that an acceleration in growth is at hand,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. “The Fed has reason to watch and wait.”

Retail sales dropped 0.2 percent as households cut back on purchases of furniture, clothing, food and electronics and appliances, as well as building materials and gardening equipment. But January’s sales increase was revised up to 0.7 percent from the previously reported 0.2 percent.

Economists polled by Reuters had forecast retail sales rising 0.3 percent in February. Retail sales in February advanced 2.2 percent from a year ago.

The surprise drop in sales in February could partly reflect delays in processing tax refunds in the middle of the month. Tax refunds have also been smaller on average compared to prior years following the revamping of the tax code in January 2018. Cold and snowy weather could also have hurt sales.

Excluding automobiles, gasoline, building materials and food services, retail sales fell 0.2 percent in February after an upwardly revised 1.7 percent surge in January. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.

They were previously reported to have rebounded 1.1 percent in January. Consumer spending accounts for more than two-thirds of economic activity. While the upward revision to core retail sales did not reverse December’s 2.2 percent plunge, it put consumer spending for the first-quarter on a slightly higher growth trajectory than before.

There was a further boost to first-quarter GDP prospects, with a second report from the Commerce Department showing construction spending rose 1.0 percent to a nine-month high in February after surging 2.5 percent in January.

A third report from the department showed business inventories increased 0.8 percent in January, matching December’s gain. Though the strong inventory build suggests demand is slowing it lifted GDP forecasts for the first quarter.

MANUFACTURING STABILIZING

“Consumption, however, is likely to remain weak, and the inventory build is getting ominous,” said Chris Low, chief economist at FTN Financial in New York.

Goldman Sachs raised its first-quarter GDP estimate by four-tenths of a percentage point to a 1.2 percent annualized rate. The economy grew at a 2.2 percent rate in the October-December quarter. The dollar was little changed against a basket of currencies, while U.S. Treasury prices fell. Stocks on Wall Street were trading higher.

While demand is softening, the supply side of the economy is stabilizing. In a fourth report on Monday, the Institute for Supply Management said its index of national factory activity rose to a reading of 55.3 in March from 54.2 in February, which had marked the lowest level since November 2016.

The reading was slightly above expectations of 54.5 from a Reuters poll of 69 economists. A reading above 50 indicates expansion in the manufacturing sector, which accounts for about 12 percent of the U.S. economy.

The ISM said 16 industries, including machinery, computer and electronic products, furniture, and electrical equipment, appliances and components, reported growth last month. Apparel and paper products industries reported a contraction.

Manufactures in the computer and electronic products industry said the sector “seems to be slowly coming out of crisis mode.” Chemical producers said “Brexit continues to be a concern, despite the fact that our organization has already rolled out a plan to minimize its impact.”

The ISM’s new orders sub-index increased to a reading of 57.4 last month from 55.5 in February. But a measure of export orders fell, likely reflecting softening global economic growth.

Factories reported hiring more workers last month, with a measure of manufacturing employment racing to a reading of 57.5 from 52.3 in February. That bodes well for a rebound in job growth in March after hiring almost stalled in February. March’s employment report is scheduled for release on Friday.

“Overall we think that things are stabilizing following the earlier deterioration rather than intensifying,” said Daniel Silver, an economist at JPMorgan in New York.