Retail sales surged by 0.8% in May according to the advance Census Bureau report – double the increase expected by Wall Street. Better yet, April’s data was revised up a touch – from 0.3% to 0.4%.

Sales at gasoline stations rose 2.0% with auto & parts dealers registering a 0.5% rise. Excluding autos and gas, retail sales were also up 0.8% on the month – again, double expectations.

After two months of declines, spending on building materials surged (+2.4%). Spending at restaurants and bars was also up, but a bit more modest 1.3%, after a slight pullback in April.

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Excluding gas, autos, building materials, and food services, the so-called ‘control group’ used in calculating GDP was up 0.5% on the month – a sliver above the 0.4% gain expected. Gains in the control group were led by miscellaneous stores (+2.7%), but department (+1.5%) and clothing (+1.3%) stores also posted good gains. In fact, only two categories, namely furniture (-2.4%) and sporting goods (-1.1%) exhibited declines in dollar terms – with the former coming off a solid stretch of gains.

Key Implications

This was hands-down one of the best retail sales reports in recent years. After a weak start to the year, with no gains during the first two months of 2018, consumers have been on a three month tear, rising by about 2% since – or over 8% in annualized terms. The persistence of the gains suggests that American consumers are, in fact, utilizing both the wage and income gains that have materialized as a result of the tighter labor market, the rise in wealth stemming from higher stock and home prices, as well as the windfall from the tax breaks implemented at the start of the year.

All in all, this reports suggests that growth in consumption will be north of 3% in Q2, helping lift GDP up by more than 4% (both figures in annualized terms). Moreover, while some of the momentum in retail spending may fade from the current, arguably unsustainable pace, consumers should remain in the driver’s seat during the medium term as the American economy benefits from a fiscal boost, lower taxes, and a reduced regulatory burden.

Today’s report will surely give the Fed hawks ammunition for pushing their case for faster rate hikes going forward. In fact, the figures corroborate the upbeat view of the economy, highlighted in yesterday’s Fed statement and strengthen the case for the upgraded ‘dots’ in the Summary of Economic Projections. The FOMC projections suggest that two more hikes are in the cards for the rest of the year, and the case is certainly stronger after this morning’s report.


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