Consumer Resilience Is a Wonderful Thing
- May Retail Sales increased by 0.6 percent, boosted by stronger auto sales.
- Ex-auto Retail Sales gained 0.3 percent as gasoline sales dipped slightly.
- Business Inventories increased by 0.3 percent in April, after a 0.1 percent decline in March.
- Initial Claims for Unemployment Insurance declined by 12,000 for the week ending June 8, to hit 334,000.
Total retail sales increased by 0.6 percent in May, suggesting that the American consumer may be a little more resilient than previously thought. In the 1990s and mid-2000s the conventional wisdom said “never underestimate the power of the American consumer.” Those days seem like rose-tinted memories in light of the current somnambulistic recovery. But perhaps we are beginning to see a bit of a twinkle in the eye of consumers again. Rising house prices and ultra-low mortgage rates are allowing households to build equity in the homes at an aggressive clip. According to the Federal Reserve’s Flow of Funds data, owners’ equity in real estate was up nearly 41 percent in March versus a year ago. Also, the S&P 500 stock index was up 22 percent in May from a year ago. Concurrently, consumer confidence appears to be trending up after stalling through 2012. As household wealth increases with gains in home equity and in investment portfolios, this may allow older workers to have more confidence in their retirement decisions, and help to bring down the unemployment rate. To sum up, there is increasing evidence of positive feedback loops within the U.S. economy that have the potential to drive the domestic economy forward, even as the rest of the world limps through mid-2013. Fiscal tightening will still be a drag for the remainder of this year, and we could see some dialing back of monetary policy if the Fed decides to start “calibrating” QE3 later this year. But a more resilient U.S. consumer would smooth the transition from the last five years of expansive policy to the next phase, which we might call “The Great Policy Unwind,” beginning in 2013 and extending through 2015.
Non-auto retail sales gained 0.3 percent in May, held down by dips in furniture, electronics and gasoline station sales. A solid retail sales report in June would provide upside risk to our Q2 real GDP growth rate forecast of 1.7 percent. Total business inventories gained a moderate 0.3 percent in May as retailers stocked up. An elevation in the overall inventory/sale ratio to the upper end of its normal range over the last ten years suggests that overall inventory accumulation will be cautious through mid-2013. Initial claims for unemployment insurance for the week ending June 8 declined by 12,000 to hit 334,000. UI claims have been somewhat erratic this year but the overall trend looks good.
Market Reaction: Equity markets are up. Treasury yields are down at both ends of the yield curve. NYMEX crude oil is down to $95.81/barrel. The dollar is down against the yen and up versus the euro.