The U.S. retail sales report released on Tuesday was a strong one by any measure. Twelve of thirteen categories rose, the most in months, as the top-line figure increased by 1.7% on the month..
Even as consumers had to spend more at the pump–sales at gas stations rose by 15.5% on the month–spending on other items not only increased, but also rose taster than expected.
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There are two tailwinds that we think contributed to the upside surprise:
- Hiring was particularly strong in March following an unusually cold February, which should boost overall income and, in turn, spending.
- Larger tax refunds because of the new tax bill should have been a significant help for consumers, especially those living paycheck to paycheck.
But there are also reasons that this spike in retail spending might be temporary:
It’s possible that consumers, whose inflation expectations are rising as the war in Iran raises prices, pulled forward their spending in March, no matter how high gasoline prices were. This shift in behavior happened recently during the tariff saga, and we can’t ignore it.
Demand destruction, especially in goods like automobiles, often shows up with a lag. It could take two to three months to see the impact of the war, with the peak not occurring until at least a quarter later.
The positive news out of the Middle East, of the possible reopening of the Strait of Hormuz, has helped lower energy prices, though they remain much higher than before the war.
Because of these factors, while we think the economy can withstand this shock, we do not expect consumers to stay this strong for at least one quarter. Beyond that, if the impact of the war continues to fade, there will be more reasons to expect consumer spending to trend upward.
For now, the new data on March’s retail sales should add to gross domestic product in the first quarter. Our current forecast of 2.2% quarterly growth looks much better now.
