US: Consumers Not Yet Throwing in the Towel

Overview:

Total retail sales fell by 0.2% m/m in April. While this was on a par with expectations, the details of the report were generally more upbeat than expected. Hence, the overall impression from the data is that consumers continue to struggle, but have not yet been throwing in the towel.

Details:

The (as expected) weak headline reading generally masked more upbeat details. Most importantly, core retail sales (ie, retail sales excl. auto, building materials and gasoline) increased at a surprisingly healthy pace of 0.4% m/m in April. Moreover, March core retail sales were revised up by 0.2pp to 0.4% m/m, while the February numbers were left unrevised. Hence, when core retail sales are measured over the past two months, it has actually been running close to its pre-slowdown trend. That said, the growth rate of the three-month average remains relatively soft at 2.2% AR. However, this could improve when the base effects turn more favourable and the rebate payments kick in during the coming months.

The revisions to February and March data will also have repercussions to the monthly real personal spending data. Growth in control sales (ie, retail sales ex. autos and building materials) were revised up by 0.3pp to 0.6% m/m in March and down by 0.1pp to -0.2% m/m in February. Overall, this leaves the path of real consumer spending somewhat higher than previously estimated. Consequently, Q1 real personal consumption is set to be revised up marginally by around 0.05pp. While this is not sufficient to change the 1% q/q AR reading for Q1, it will provide real personal spending with a stronger-than-expected entry to Q2.

While the details of the retail sales report were generally healthier than expected, this is not likely to prevent a soft reading in real personal spending data in April. Firstly, car unit sales were once again soft in April. Moreover, high headline PCE inflation will do its painful job of eroding the nominal spending figures. Hence, we expect real personal spending is set to print a 0.1% m/m decline in April. The bottom line is that real personal spending has been moving more or less sideways over the past three months, increasing only by 0.1% AR in the February - April period.

Assessment & Outlook:

Barring any further revisions, the April report suggests that consumers have fared a notch better than previously anticipated over the past three months. With rebate payments flowing to consumers for a third week (almost 25% of the transfers will be completed by the end of this week), we should expect some improvement in personal spending numbers very soon. This could leave our current estimate for a 0.5% q/q AR increase in Q2 real consumption and a 0.5% Q/Q AR decline in Q2 real GDP a bit on the low side. However, much depends on the size and the timing of the effect from rebates payments, which still remains very uncertain. The recent picture of the US economy being on the brink of - but not definitively in - a recession, still seems well preserved.

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

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