April U.S. retail sales: upside surprise?

This comes from Marc Chandler, head of the Brown Brothers Harriman Currency Strategy team (emphasis added):

After today there is an important US economic report every day this week. Tomorrow’s report on the March trade balance and Wed March business inventories may help economists fine tune their expectations for Q1 GDP revisions.  Currently the data is tracking a small upward revision to the initial 6.1% annualized contraction.  With a large output gap and increasing slack in the labor market and capacity utilization rates, neither the PPI nor CPI are likely to provide much of a surprise for investors.

One report that potentially surprise the market is US April retail sales. Recall in an unusual development, the US consumption grew in Q1 09 even though the economy contracted.  The consensus calls for a flat headline reading in April retail sales, but a couple of considerations suggest the risk is on the upside.  First, at the end of last week, several–more the a dozen–US retailers raised their earnings guidance after April sales data showed American shoppers were back in the stores (after a 1.2% contraction in retail sales in March).  

Reports suggest that clothing and discretionary spending led the way.  Retail Metrics, which follows monthly sales figures, said its overall index rose 1.5%.  Of note, last year, Easter fell in March.  This year in April and this may be a consideration in year-over-year comparisons.  Also, gasoline prices rose modestly in April and this also may help inflate the headline retail sales figure.

Separately, tax refunds and the payroll tax cut may give more Americans the wherewithal to act on pent up demand.  Unlike last year’s tax cut, that was given as a lump sum payment, which did not lead to a big jump in spending, this year’s payroll tax cut will be dripped in relative small sums and may be seen a permanent tax cut and therefore may bolster spending more.

My own view is that personal consumption expenditures, which are now more than 70% of U.S. Gross Domestic Product, are at an unsustainably high rate.  However, this has been true at least since the monetary easing campaigns of Alan Greenspan in 2002-2003.  While U.S. consumption must decline relative to overall GDP over the longer term, all indications suggest this is not happening at present.  As a result, retail sales growth may contribute positively to G.D.P. in Q2 as well.


It should be clear that the Obama Administration’s economic policy is causing a return to the unbalanced global growth dynamic where U.S. consumers were the consumer of last resort, whether intentional or unintentional.

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