After surprising to the upside in April with a modestly positive print of 0.1%, retail sales rose by 0.6% in May, exceeding expectations. Strong motor vehicle sales were again a significant contributor to headline results; excluding auto sales, the gain for the month was a still-solid 0.3%.
Today’s print will be well-received as evidence that the U.S. consumer is still spending, seemingly shrugging off the headwinds of cuts in government spending and lackluster income growth. Nonetheless, pressure is still largely on the consumer to carry most of the water to keep the economy moving forward, and overall growth will likely remain constrained as a result.
From a broader view, retail sales appear to have settled in to a growth pattern consistent with many other measures of recent economic activity, suggestive of slow, positive improvement.
The economy added jobs in May at a moderate clip, though income growth is only modestly outpacing inflation. With the savings rate having already fallen substantially in recent years, robust improvement in consumer spending driven by further reduction in savings is increasingly unlikely. Better income growth is going to be necessary to fuel consumer spending down the road.
From a big picture perspective, there is an emerging positive story for consumers and the potential for a virtuous cycle to take hold. Sentiment is up, and that increased optimism is translating to more carefree spending, particularly on higher ticket items like homes and cars. Consumers have come a long way since the depth of the recession, even as there is room for continued improvement in the years ahead.
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