Chief economist update: Back to the shops

The US consumer is back...and with a vengeance.

Retail sales rebounded by a higher than expected 0.6% in the month of March following three consecutive months of declines - 0.1% in December, -0.2% in January, -0.1% in February - that took the annual growth rate up to 4.5% from 4% in the previous month.

The details of the report show that the bulk of the March increase was due to a 2% jump in auto purchases during the month.

Nevertheless, retail sales ex autos also increased by 0.2% in the month of March - equal to February's monthly growth rate and in line with expectatios - and 4.5% in the same month of 2017.

The US Census Bureau reported that eight of the 13 major retail categories reported increases in the month of March:

These include: autos (2%); furniture & home furniture stores (0.7%); electronics & appliance stores (0.5%); food & beverage stores (0.2%); health & personal care stores (1.4%); general merchandise stores (0.3%); non-store retailers (0.8%); food services and drinking places (0.4%).

The five that registered declines include: sales at gardening and building material stores (-0.6% but this was after a strong 2% increase in February); gasoline stations (-0.3% from +0.1% in February); sporting goods, hobby, book & music stores (-1.8% from + 3.3%); clothing & clothing accessories stores (-0.8% from +0.2%); miscellaneous store retailers (-0.3% from -2.1%).

The bad news is that the March rebound has come in late for consumer spending to make a significant contribution to first quarter US GDP growth. Estimates show that consumer spending slowed to an annualised rate of 1.5% in the March quarter after the December 2017 quarter's strong 4% advance.

Still, this represents the US consumers' resilience in the face of the increased volatility in the financial markets in the first quarter of 2018 and the prospect of another two or three more interest rate hikes this year.

Why not? Average weekly earnings growth have accelerated to 2.7% in the year to March from 2.6% in the previous month and take home pay would be  even better by the reduction in income taxes which, according to reports only started to be reflected in employees' pay cheques in February.

Stronger consumer spending suggests that US businesses would be able to easily pass on higher costs to shoppers - US import prices increased by 3.6% in the year to March; producer prices rose by 3% over the same period - lifting overall inflation in the economy.

This gives credence to the Fed's thoughts revealed in the minutes of the 20-21 March FOMC meeting:

"A number of participants indicated that the stronger outlook for economic activity, along with their increased confidence that inflation would return to 2% over the medium term, implied that the appropriate path for the federal funds rate over the next few years would likely be slightly steeper than they had previously expected."

Repeat, "...slightly steeper than they had previously expected".

Ben Ong is the Director of Economics and Investments at Rainmaker Group. He previously worked as a fund manager, economist, asset allocation strategist, portfolio analyst and stock market analyst. Check out his economics analysis here.

Read more: Fedretail salesMarch FOMCretail sales ex autosUS Census BureauUS GDP
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