US: Auto and Gasoline Sales Lift Consumer Spending

• US retail sales rebounded as expected in May, and April sales were revised up. However, the headline number looks better than the details.
• Higher prices at the pump lifted nominal gasoline sales, which boosted the headline number. Core sales were flat on the month, and the trend in consumer spending thus remains a stabilisation. The data is broadly in line with our expectation of zero growth in private consumption in Q2.
• Apart from autos and gasoline, consumers continue to be reluctant to spend, despite the lift to real incomes from tax cuts and transfers. However, we expect the savings rate to retrace somewhat and consumption to pick up again in the coming months, as the shocks from tight credit, declining net wealth and skyrocketing unemployment fades.

Details: A spike in gasoline sales of 3.6% m/m, as higher prices at the pump boosted nominal sales, was a big factor in the rise in retail sales. Auto sales rebounded as well, rising 0.5% m/m. However, it looks like consumers went bargain hunting, bringing nominal sales down, as unit auto sales had indicated a much higher increase in sales.

The details of the report are mixed. Clothing sales posted a 0.4% m/m increase and building materials are up 1.3% on the month, while weakness was seen in General merchandise, Electronics, Furniture and Department stores.

Core sales (excl. autos, gasoline and building materials) was flat on the month. Taking the upward revision to April sales into account and assuming PCE inflation at 0.2% in May, this leaves overall Q2 real private consumption growth tracking 0.2% q/q AR - not far from our current forecast of 0.0%.

Assesment & Outlook: So far, the major income boost from tax relief, low energy prices and mortgage refinancing has only been able to produce a stabilisation in consumer spending since October. Consumers have raised their savings rate extraordinarily fast over the past eight months which has left consumer spending under pressure. Today's data suggests that this trend continued in May with real personal spending likely to post a modest 0.3% m/m increase.

Looking forward, absent any new negative shocks, we are likely to be past the rapid upward adjustment in the savings rate. We expect the impact from the financial shock, the loss of net wealth and the rise in unemployment to fade gradually over the coming months, removing some of the upward pressure on savings. Fiscal stimulus will continue to lift incomes over the coming months, and with the monthly savings rate to take back some of the increase over the coming months, we expect private consumption growth to be back in positive territory in Q3.

Danske Bank
http://www.danskebank.com/danskeresearch

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