Surprising rise in US retail sales point to solid economy

Washington — US retail sales increased more than expected in March amid a surge in receipts at online retailers, further evidence that the economy ended the first quarter on solid ground.

The report from the commerce department on Monday, which followed news this month of robust employment gains in March and a pickup in consumer inflation, bolstered expectations that the Federal Reserve could delay cutting interest rates until September.

It prompted economists at Morgan Stanley to raise their GDP growth estimate for the first quarter to a 2.7% annualised rate from a 2.4% pace. The economy grew at a 3.4% rate in the fourth quarter.

“The continued resilience of consumption is another reason to suspect the Fed will wait longer before starting to cut interest rates, which now we think won’t happen until September,” said Andrew Hunter, deputy chief US economist at Capital Economics.

Retail sales rose 0.7% last month, the commerce department’s Census Bureau said. Data for February was revised higher to show sales rebounding 0.9% instead of the previously reported 0.6%.

Economists polled by Reuters had forecast retail sales, which are mostly goods and are not adjusted for inflation, would rise 0.3% in March. Sales jumped 4.0% on a year-on-year basis in March.

Despite higher inflation and borrowing costs, spending is continuing to hold up, confounding predictions of distress among lower-income households, thanks to the resilient labour market.

The latest Bank of America credit card data showed lower-income spending continues to outpace higher-income spending.

Wage growth

“An important reason is that, though lower-income consumers have been disproportionately affected by inflation, they have also been the biggest beneficiaries of the robust labour market,” economists at Bank of America Securities wrote in a note. “Lower-income workers have seen the largest cumulative wage gains since the start of the pandemic.”

Job gains averaged 276,000 per month in the first quarter, compared with 212,000 in the October-December period. Wage growth remains above 4% on a year-on-year basis.

Sales last month were boosted by a 2.7% acceleration in online receipts after a 0.2% gain in February.

Sales at petrol stations rose 2.1%, reflecting higher prices at the pump. Prices at the pump increased about 8.1% to US96c/l (R18.24/l) in March, data from the US Energy Information Administration shows.

Building material and garden equipment store sales advanced 0.7%. Sales at food services and drinking places, the only services component in the report, rose 0.4% after climbing 0.5% in February. Economists view dining out as a key indicator of household finances.

But there were some pockets of weakness. Receipts at motor vehicles and parts dealers fell 0.7%. Furniture store sales slipped 0.3%, likely as higher mortgage rates constrain home purchases. Sales at sporting goods, hobby, musical instrument and book stores dropped 1.8%.

That suggests households continue to focus on essentials and are cutting back on discretionary spending. Receipts at electronics and appliance outlets decreased 1.2%, while those at clothing retailers fell 1.6%.

Retail sales excluding cars, petrol, building materials and food services increased 1.1% in March. Data for February was revised higher to show these so-called retail sales gaining 0.3% instead of the previously reported unchanged reading.

Core retail sales correspond most closely with the consumer spending component of GDP. The jump in core retail sales in March and the upward revision in February suggested only a slight slowdown in consumer spending growth from the fourth quarter’s robust pace. Economists had expected consumer spending to cool down considerably after retail sales slumped in January.

“Given the various stimulus programmes have stopped and money from them has been spent, consumer spending now rests firmly on incomes from pay cheques, which continue to expand with the labour market,” said Robert Frick, corporate economist at Navy Federal Credit Union. “This means a solid expansion should continue.”

Reuters