NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist
INDICATOR: April Retail Sales
KEY DATA: Sales: +0.5%; Excluding Gasoline: +0.2%; Excluding Gasoline and Food: 0.0%
IN A NUTSHELL: “Money is flowing out of consumers’ pockets but an awful lot is being pumped into gasoline tanks.”
WHAT IT MEANS: The economy continues to grow but the overriding question is: “How will the surge in gasoline prices affect the sales of other goods?” We got some insight into that with the April retail sales numbers and the initial returns are not great. While overall demand rose solidly, over sixty percent of the rise came from the increase in gasoline purchases. The other source of pain for consumers, food costs, also played a role with purchases increasing sharply as well. Indeed, when you exclude food and gasoline sales, where the rise was largely price driven, total retail sales were largely flat. People did buy more vehicles, which we knew from the unit sales numbers. Clothing and general merchandise stores did okay but the only winner was online companies. In contrast, furniture, electronics and appliances, sporting goods, restaurants and health care products were all off. The best news was an upward revision to the March numbers which could offset some of the negative from the wider trade deficit.
MARKETS AND FED POLICY IMPLICATIONS: This was a disappointing but not surprising report. Wage and salary income is not growing strongly so for most people, the higher gas prices are a constraint on their budget. But the commodity bubble (yes traders, it was a bubble and there was speculation) has at least started to deflate if not burst so going forward, we should see lower gasoline prices. The issues being created by the Mississippi flooding should only be short term. Look for the negative effects of the oil price spike to be unwound as we move through June (prices go up quickly but for some strange reason they fall more slowly). Thus, second quarter consumption should be soft but it could rebound sharply in the summer. If that sounds like a rationalization for my robust second half of the year forecast, so be it. But I am sticking to that forecast. This report has so much noise due to gasoline that I doubt the Fed will think much about it. But traders may get a bit concerned. What troubles me is that while gasoline prices may fall, food costs continue to rise as we saw in today’s wholesale price data. That could keep spending from really breaking loose. Nevertheless, retail sales should improve during the second half of the year.
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