Durable goods orders in April showed broad weakness, as expected, falling 2.1 percent. However, in addition to April results, March durable goods numbers were also revised downward, compounding the impact and creating a weaker trend. A closer look at the data demonstrates that shipments of goods, excluding aircraft, were down sharply; this can be considered a proxy for capital expenditures in the current quarter. The weakness puts the focus squarely on consumer spending, the largest component of GDP, to drive growth in the economy.
The weakness puts the focus squarely on consumer spending, the largest component of GDP, to drive growth in the economy.
While the economy grew at a solid 3.2 percent in the first quarter of 2019, growth was driven primarily by an increase in inventory purchases and a change in the trade mix, rather than by consumer spending. According to Prodco Analytics, retail traffic declined for the week ended May 18, which includes the critical Mother’s Day holiday. While it’s possible that online sales were strong, brick-and-mortar transactions still account for close to 90 percent of all retail sales.
In April, we noted that gasoline prices were rising as we head into the summer months. Historically, rising gas prices have not been significant enough on their own to have a material impact on consumer spending. However, when coupled with trade tensions, they could challenge consumer confidence.
Wages are still strong, and unemployment is low. Consumers should have money to spend this summer and into the holiday spending season later in the year. How and if they choose to spend that money will have a significant impact on the growth of the economy in the near term.
