US retail sales rebound, but overall trends remain soft

Retail sales in the United States posted a strong rebound in the month of March snapping a three month consecutive decline. Retail sales were boosted by a bigger than increase in motor vehicle sales and other big items. Despite the stronger than expected increase in retail sales, the overall report showed only a modest pace of growth.

This was surprising considering the solid labor market and growing paychecks amid inflation staying largely stable.

The retail sales report, which is a measure of the outlays at stores, retail fronts including restaurants and online shopping showed an increase of 0.6% on a seasonally adjusted basis in March, on a month over month basis. The official data released by the U.S. Commerce Department beat the economists’ expectations of a 0.4% increase on the month.

The rebound in retail sales came about as sales during the previous months posted declines. Retail sales since December were seen falling 0.1% while dropping 0.2% in January and 0.1% in February.

Despite the increase in the retail sales report, economists did not see anything strong in the report. For one, the data showed that consumer spending was seen rising at a moderate pace, attributed to a surge in vehicle sales.

Excluding autos and gasoline purchases, retail sales were seen rising just 0.3% on the month in March. The overall retail sales report was seen rising just 0.2% in the first quarter of the year. On a quarterly basis, excluding autos, retail sales were seen rising at a pace of 0.7%.

Based on the retail sales report, it is widely expected that the U.S. first quarter GDP might have increased at a slower pace of just around 2.0%. This marks a significant pace of slower growth. In the fourth quarter, the U.S. GDP was seen expanding at a pace of 2.9%.

The advance GDP report which is expected to be released this Friday is forecast to show that the U.S. economy grew at a pace of 2.2% during the first three months of the year. This marks a slower pace of GDP expansion compared to the previous quarter ending December 2017.

As of the final revised GDP, data showed that the U.S. economy had advanced 2.9% during the final quarter of last year. The revisions came about as the first revised GDP showed a slower pace of expansion.

 

However, the slowdown in the first quarter was widely anticipated as the first quarter is often said to be seasonally low.

Looking ahead, retail sales spending are expected to increase in the coming months. This hawkish view comes from the fact that with the continued improvement in the labor market supported by the tax cuts and other fiscal policies, consumers are expected to drive spending further in the coming months.

The GDP report comes ahead of the FOMC meeting that will be held during the first week of May. After the Federal Reserve officials hiked interest rates at the March monetary policy meeting, the monetary policy meeting in May is expected to be a non-event.

Investors will however be clued into the central bank’s statement. Various officials in recent times have maintained an optimistic view on the U.S. economy and inflation. They expect consumer prices to start rising steadily over the next couple of months.

This is expected to keep the hawkish view from the Fed which could raise rates at the FOMC meeting due in June. The markets are expecting to see three more rate hikes from the Federal Reserve this year. At the time of writing, the CME Group’s Fed funds rate assigns a 98% probability that interest rates will remain unchanged at 1.50% – 1.75% at this month’s FOMC meeting.