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Did April’s Uptick in Retail Sales Provide Grist for Fed Hike?

May 17, 2017
Did April’s Uptick in Retail Sales Provide Grist for Fed Hike?

April’s retail sales data might have underscored the Federal Reserve’s suggestion that weak Q1 growth was an anomaly and that consumer spending—the stamina of a robust economy—appears to be reenergized.

Though last month’s 0.4% increase in retail sales missed Wall Street’s expectations for a 0.6% gain, it was the best showing in three months. Plus, it came after the government upwardly adjusted March numbers to a 0.1% advance from a 0.2% pullback, suggesting that the economy in Q1 and going into Q2 is in better shape than it had previously appeared.

Some economists seem to expect that gross domestic product (GDP), the key measure of economic growth, might come out much stronger when the second estimate for Q1 is released May 26. The initial 0.7% estimate released on April 28 was widely considered anemic.

What’s more, the Consumer Price Index (CPI) rebounded in April, as consumer inflation, measured by headline and core import and export prices, expanded by 0.2%.

Stronger Retail Sales Come Despite Weak Retail Earnings

 “That sales number shows that the consumer is still out there and spending,” said JJ Kinahan, chief market strategist at TD Ameritrade, referring to April retail sales. “It’s a decent number that comes against a backdrop of pretty bad first quarter earnings for many big-name retailers.”

Indeed, Friday’s results arrived amid the onset of a string of grim quarterly earnings reports in which revenues declined at some of the nation’s largest brick-and-mortar stores like Macy’s (M), Dillard’s (DDS), Kohl’s (KSS), and J.C. Penney (JCP). But the report did show strong spending at so-called nonstore retailers, suggesting ecommerce continued to boom.

Moreover, April retail sales might have bolstered sentiment for another interest rate increase at next month’s Federal Open Market Committee (FOMC) meeting, considering that consumer confidence is strong and that the calendar seems to favor reasons to shop.

“What’s the shopping impetus going forward? Memorial Day, the summer holidays, the entire country enjoying good weather, and then it’s back-to-school shopping,” Kinahan said.

The probability of a hike in interest rates by June, based on 30-day Fed Fund futures prices, stood at about 74% as of Monday. That’s up from 70% late last month.

Wall Street’s Check on Consumer Spending

Each month, the U.S. Commerce Department offers up a snapshot of consumer spending when it reports retail sales results. The data can often give Wall Street a sense of economic growth and sometimes provide clues about what might move the Federal Reserve to up interest rates again.

Consumer spending accounts for better-than two-thirds of GDP and is closely watched by the Fed. The monthly retail sales reports, gleaned from hard data that retailers provide the government, account for goods like food and energy, autos, apparel, and home-improvement merchandise. The report doesn’t include dollars paid for services like health care, hotel stays and entertainment expenses, which comprise roughly two-thirds of consumer spending.

The report is considered a critical indicator of the consumer’s attitude because if she’s spending big chunks of cash on goods, she’s likely to be comfortable with her ability to spend, which is predicated on employment, income, debt, and overall confidence that those levels will stay manageable.

Sometimes sales in one sector will offset sales in another, offering another peek into the mindset of the consumer. For example, sales at gas stations were 12.3% higher in April than they were in the year-ago period, reflecting the higher cost of oil per barrel. Perhaps that might have contributed to the 0.5% decline in general merchandise store receipts and 0.3% drop at food and beverage stores last month.

In what Kinahan called the “Amazonication” of overall shopping habits, sales at nonstore retailers, which include online sales, climbed 1.4% in April while department-store sales crept up 0.2%. On the year, nonstore sales jumped 11.9% but department-store receipts fell 3.7%.

“The consumer is still spending, but doing it differently than what we’ve been accustomed to,” Kinahan said. “It’s now up to bricks-and-mortar retailers to figure out how to capture the consumer.”

As investors consider adding or subtracting retail stocks from their portfolios, Kinahan said to listen to conference calls and read earnings reports closely for insight into the consumer. “How do CEOs talk about the consumer? What do people who spend $2.50 for a cup of coffee do at the Macy’s and Targets of the world? And what is the CEOs’ bricks-and-mortar plan?” Kinahan said. “Customers are spending money, but what are they spending money on?”

What Will the Fed Do?

The 74% chance of a rate hike by next month is down from above 80% last week but still higher than it was a month ago, helped by the retail sales and employment data.

FOMC members indicate that they anticipate consumer spending to tick higher. At its May meeting—after the release of the March retail sales report—the Fed kept interest rates intact at 0.75% to 1%, and noted that spending was still firm. “Household spending rose only modestly, but the fundamentals underpinning the continued growth of consumption remained solid,” the statement said.

It also called the slowdown in first-quarter economic growth “transitory” and said it expected that “economic activity will expand at a moderate pace.”

Another drop in unemployment might help foster that. The jobless rate fell to 4.4% in April, and the average monthly employment gain stood at 174,000 jobs over the past three months, the government said.

There’s one more jobs report due before the Fed meets in mid-June, and if that report also looks strong, it would potentially give the Fed another reason to consider hiking rates for the second time this year. It last raised rates in March. Fed funds futures predict about a 50% chance of a third hike by the end of 2017.

“Our overall economic growth outlook remains in place and we do not think the recent soft inflation prints will deter Fed officials from raising rates at the June meeting,” Wells Fargo said in a recent report.

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