Retail sales increased again in February, rising 1.1%. The result was surprising strong, not only pointing to a reacceleration in spending after a soft January, but also easily exceeding the consensus expectation for an advance of 0.5%. Excluding autos, growth of 1.0% for the month was still very solid, while the 0.4% result after stripping out the impact of higher gas prices was also better-than-anticipated.
The report provided further clarity around how consumers are responding to the higher payroll taxes and lower take-home pay. Gains in the stock market, the continuing resurgence in the housing market, and better job creation in recent months are helping to offset the reduction in discretionary income and bolstering a surprising resilience on the part of consumers.
A reacceleration in retail sales growth is a near-term positive sign for the economy. Moreover, economic data has been surprising to the upside, which could further boost investor sentiment. Improvement in economic conditions should be supportive of corporate profits, while elevated unemployment and modest inflation pressures provide favorable conditions for the Fed to maintain its accommodative monetary policy stance.
However, the growth in retail sales – and household consumption more broadly – is coming at a price. Consumers sharply reduced savings rates during January, as households are dipping into savings to prop up spending in the absence of better income growth. With the savings rate now down to just 2.4% in January, the ability for consumers to reduce savings to fuel spending is increasingly limited.
Attention remains fixed on the impending spending cuts and the potential for the parties in Washington to reach a deal to dampen the impact of the sequester. There are still more questions than answers on the magnitude of the impact. It’s still highly likely to be an incremental – albeit potentially modest – headwind for the economy. Improvement in housing and auto sales in particular could be powerful counterbalances, as there is little sign in either sector of the kind of weakness that would be typical during an economic soft patch. The consensus view for soft growth the months ahead remains intact, but the willingness of households to continue to increase spending despite that uncertainty is a near-term positive.
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