Tax Rebate Cheques Weigh in - U.S. Retail Sales Surge

U.S. retail sales came in stronger than anticipated in May, rising 1%, double market expectations. The good news went even further back as growth in April sales were revised higher to 0.4% from an originally reported -0.2%. Excluding the usually volatile auto component, sales rose 1.2% (also double market expectations). Despite earlier industry reports of a decline, auto sales advanced by 0.4%, suggesting that the tax rebate cheques are having a widespread beneficial impact.

The strong overall gain in retail sales was widely spread among individual components - all but miscellaneous stores reported increases. Leading the way, as expected, were gasoline stations, where sales grew by 2.6% thanks to a 5% increase in gasoline prices. They were followed by building materials and gardening equipment stores, reporting a large 2.4% advance. The component of retail sales that goes into the GDP add-up, retail sales excluding automotive and building material and garden supply stores, rose 1.1% in the month following a 0.8% increase in April.

With $50 billion in tax rebates mailed out in the month, May's retail sales were seen as an early indicator on the way U.S. consumers would react to the fiscal stimulus package. In the event, the boost to the economy appears to be unfolding as anticipated, perhaps even slightly better. After rising at an annual rate of 1% in the first quarter, U.S. consumer spending is projected to pick up pace to 1.5% in the second quarter. May's strong retail sales report might suggest some upside to this. While the U.S. economy has not skated through its soft patch yet, there have been a number of upbeat indicators recently suggesting that the U.S. economic slide is stabilizing. This is consistent with the Fed remaining on the sidelines through the end of this year.

RBC Financial Group
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The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.