US Retail Sales Point to Continued Soft Demand

Chart Source: Bloomberg, DriveWealth By Brian Dolan, Head Market Strategist

US April Retail Sales Disappoint

Economists were expecting a favorable increase in US consumer spending in April, in keeping with the idea that weakness in the 1Q was due to several one-time factors (bad winter weather; West Coast port strikes; drought, etc.), and the rest of the year would be much better. That expectation is central to the overall optimism surrounding the outlook for the US economy going forward, and to the ongoing debate over the timing of the Fed’s first rate hike.

Unfortunately, those expectations have fallen flat with today’s April US advance retail sales report. The headline retail sales number registered a change of 0.0% month-over-month (MoM) versus expectations of a meager 0.2% increase, and a prior change of 1.1% in March. Readers should note that the headline number is vulnerable to multiple distortions (auto sales, gas prices, etc.), so we need to look at the underlying, core numbers to get the real picture. And here, too, the picture is less than bright.

April retail sales excluding autos (ex-autos) rose just +0.1% against forecasts of +0.5% and a prior increase of +0.7% in March. Excluding autos and gas, retail sales rose +0.2% versus forecasts of +0.6% and a prior increase of +0.7%. Lastly, the retail sales ‘control group’ number (which excludes gas, food, autos, and building materials, and is a direct input into GDP calculations), came in flat (0.0% MoM) versus estimates of a +0.5% increase (prior +0.5%). The much hoped-for consumer led rebound in the 2Q is off to a decidedly disappointing start.

US Retail Sales have been decidedly weak in recent months. Even the rebound in March is largely attributable to an early Easter, which shifted spending into March from April. The overall trend over the last year (red regression line) fails to inspire much confidence in the path forward.

Impact on Fed Timing

Beyond the obvious implications for US growth (consumer spending accounts for roughly 70% of US GDP), there is little in recent retail sales reports to suggest demand-driven inflation pressures are building. Taken together, and in light of recent backsliding on the jobs front, there is little reason to expect the Fed to start raising interest rates. The current consensus among economists is for an initial rate hike in September, though market pricing still favors December as go-time.

We think the recent data suggests the Fed will continue to err on the side of caution and maintain our view for no Fed action in 2015. Given the anemic history of the US recovery and the recent slippage in current data, coupled with global headwinds (European 1Q GDP at 1.0%; China still weakening), there is little reason for the Fed to rock the boat with a rate hike.

Given this backdrop, we continue to view the recent move higher in government bond yields as a temporary, position-driven unwinding (too many investors holding long bond positions being forced to sell as prices drop, sending yields higher). So, too, with the recent rebound in commodity prices.

Stocks remain the last refuge of investors seeking meaningful returns, and there, as well, we are increasingly cautious. Complacent long positioning appears to be defying recent economic data, and gravity, and we would not be surprised by an abrupt exodus, similar to what has happened in bond markets over the last month (everyone heads for the exit at once). However, from a longer-term investing perspective, we would welcome a substantial correction (5-10%) as a long-term buying opportunity.