American consumers finished the quarter on a much stronger note with a rebound in spending at retail stores after two disappointing months.
While rising inflation because of tariffs should account for at least half of the total increase in retail sales, which include mostly goods, the other half means higher overall spending. Among the highlights from Thursday’s retail sales data:
- Total sales rose by 0.6% on a monthly basis, while the control group rose by 0.5%.
- The main driver was a sharp increase in auto and parts sales, up by 1.2%.
- Ten out of 13 categories registered an increase on the month.
The rising volume, especially coming from the control group, should alleviate some pressure on gross domestic product in the second quarter, which is expected to bounce back from a decline in the first quarter.
Our forecast is pointing to a 2.5% increase in GDP in the second quarter after Thursday’s data releases with risks to the upside.
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A stable labor market, at least for those who are employed, has continued to be the driving factor for solid spending.
Layoffs, according to the initial jobless claims data also released on Thursday, fell last week, a good sign given the increasing concerns following the recent job reports regarding private job gains.
Noise or signal?
The upside surprise in retail sales might not be sufficient to guarantee further optimism when it comes to how consumers will deal with tariffs.
The distortion from consumers pulling ahead their spending because of tariffs should keep us from overreacting to one month of good data.
But there are major tailwinds coming from the fiscal channel with the new tax legislation and potentially from monetary policy if the Federal Reserve cuts its policy rate in the second half of the year.
Given the uncertainties in the economy, everyone should prepare for more data surprises in both directions, upside and downside.
