A positive retail sales data
released last week has increased expectations that the economic conditions from
the perspective of consumer spending are, perhaps, not as dire as some other
areas might appear. The strong data is important in light of the upcoming FOMC
meeting this week wherein Fed is widely believed to signal a rate cut sometime later
this year as interpreted from Fed chair’s recent comments.
US retail sales, as calculated by U.S. Census Bureau (USCB), for the month of May increased by 0.55% from April and was broadly near the market consensus. On an annual basis, retail sales in May increased by 3.16% per annum from May 2018. This was slightly less than the annual change registered in Apr i.e. 3.73% p.a. Data for April was also revised up from -0.2% per month to +0.3% per month.
As the following chart suggests, the month-over-month (MoM) percentage change in the headline retail sales is very noisy, showing up and down movements in consecutive releases. This reflects the balancing nature of the data when seen from an average month’s perspective.
The year-over-year (YoY) percentage change, as shown in the following chart, indicates the broad rebound we’ve seen this year. We also show a horizontal red band in this chart covering 1.25% – 1.75% range. Historically, a weak retail sales has never been able to sustain below this band except during the Global Financial Crisis. Therefore, it was worrisome when retail sales for December 2018 (reported in Jan 2019 and revised in Feb 2019) had increased by just 1.64% per annum. However, the consistent acceleration in the annual growth since January 2019 brings in confidence that the consumer demand is still robust.
The increase in initial jobless claims, reported last week, presents a doubt whether labour markets will continue to tighten from where they are and positively affect consumer spending. However, we should not read too much into one single release.
As shown in the chart below, overall in 2019, retail sales has been increasing compared to 2018. However, the pace of such increase is a bit smaller than the pace of increase witnessed in 2018 from 2017.
Additionally, retail sales for the control group (which excludes data for automobiles, gasoline, building materials and food services) increased in May by 0.5% on a month-over-month basis. The data for April was revised up to +0.4% per month from the earlier +0.0% per month. The retail sales control group overlooks the more volatile parts and correlates well with consumer spending (which is a component of GDP).
The immediate movement in US dollar was up as the US dollar index went up by approximately 0.3% within 30 minutes of the release. By the end of Friday’s session, the dollar index had strengthened by approximately 0.5%. Similarly, US treasury yields had increased by 3.5 basis points within an hour of the release although it made no further gains.
The retail sales data could bring relief as it suggests that the economic conditions are still robust from the perspective of consumer demand. This is especially important in light of recent comments from the Federal Reserve earlier this month that were widely seen as an indication of Fed signaling a rate cut later this year during the FOMC meeting this week. Interest rate futures have already priced in at least 2 rate cuts of 25 basis points each in this year. This positive retail sales data will also be helpful due to the recent softening of earlier released data points and the escalating trade war between US and China.
Retail sales is effectively an indication of how much the consumers are spending on both durable and non-durable goods. As a result, retail sales has good relation with consumer spending and personal disposable income. The title of this economic indicator should not confuse you to believe that the value only include sales at physical retail stores; it actually also includes e-commerce sales. The data is released by USCB after making adjustments for seasonal factors. USCB also simultaneously releases an unadjusted data series.
There are 4 data series released simultaneously: - a seasonally adjusted advance series for the immediately preceding month, a seasonally adjusted regular series for the month prior to the immediately preceding month (and their unadjusted counterparts). The former is the result of the “Advanced Monthly Retail Trade and Food Services Survey” and the latter is the results of the “Monthly Retail Trade and Food Services Survey”. You can read more about them here. The series, effectively reflecting dollar value of sales, exclude the sales taxes from the sales figures but do include the excise taxes.
The number released today for May was the advance series and the number for Apr was the result of the full survey.
Retail sales is one of the most important economic indicator as it is used by the Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce as an input while calculating GDP. It is also used by several government and academic bodies including the U.S. Federal Reserve Board (the central bank of U.S.) to assess and forecast the economic conditions.