The past three U.S. retail sales reports have been rather dour affairs in relation to the economy. Retail sales fell 0.9% in December, 0.8% in January, and 0.6% in February. The weakness in consumer spending will likely add a dose of disappointment to the Q1 GDP number, which could come in significantly below consensus, and has probably contributed to the interest rate market pushing back expectations of when a Federal Reserve rate increase will take place. At the beginning of the year, Fed Funds futures reflected a likelihood of about 60% that the Fed would hike rates by June. Now, that likelihood has diminished to around 10%, and a rate hike is not fully priced into Fed Funds futures until year-end.Consumers spent the December to February period saving the unexpected windfall from lower gasoline prices.
However, not to worry. The death of the US consumer has been greatly exaggerated.
First of all, the decline in retail sales has been mostly related to falling gasoline prices. Excluding autos and gasoline, retail sales actually rose 0.1% in December and fell just 0.1% in January and 0.2% in February. Some of the weakness in January and February can be attributed to an exceptionally cold and snowy winter in the central and eastern United States.
Secondly, retail sales in real terms are fairly robust (Figure 1). Year on year overall retail sales are up 1.7% in both real and nominal terms, since the inflation rate is zero. Excluding autos and gasoline, retail sales are up 4.5% year on year as of the end of February, well above the core rate of inflation which clocks in at 1.7% -- admittedly, an imprecise measure since one excludes autos and gasoline and the other (core inflation) excludes food and energy. Even so, approximate real growth of 2.8% year on year is respectable (Figure 2).
Thirdly, labor income continues to grow rapidly. In the past year, average hourly income has risen by 2.1%, while the average number of hours worked was flat (comparing March 2015 to March 2014). Additionally, the number of workers has grown by 2.2%. When these are added up, it shows total labor income has risen by 4.3% in both real and nominal terms, since the rate of inflation has been around 0%.
Bottom line: consumers spent the December to February period saving the unexpected windfall from lower gasoline prices (Figure 3). Many consumers also hunkered down indoors avoiding frigid weather and winter storms. This won’t last, of course, with the arrival of spring. We expect a surge in spending later this year. The first test of this hypothesis will be the U.S. Census Bureau’s March retail numbers to be released on April 14. Even if the March figures remain soft, it is reasonable to expect retail sales to pick up significantly during the second quarter of 2015.
If consumer spending rebounds and the labor market remains robust, it would not be surprising to see financial markets reassess their views regarding the pace of Fed rate hikes and begin pricing in a somewhat more aggressive policy tightening.
All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the authors and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.
Erik Norland is Executive Director and Senior Economist of CME Group. He is responsible for generating economic analysis on global financial markets by identifying emerging trends, evaluating economic factors and forecasting their impact on CME Group and the company’s business strategy, and upon those who trade in its various markets. He is also one of CME Group’s spokespeople on global economic, financial and geopolitical conditions.
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