U.S. retail sales were stronger than most forecasters expected in June and provide compelling evidence that consumer spending remains strong enough to sustain the U.S. economic expansion in the short run. Even if fragile and subpar relative to historical averages, against the backdrop of low global interest rates, the economic implications of the retail sales numbers are supportive of the equity and credit markets.
While there was a small downward revision to retail sales data for April and May, the components used as inputs to quarterly data on the nation’s gross domestic product (GDP) were revised higher for those months. (The GDP report will be released on 29 July.) For the quarter, retail sales increased at a very strong 4.1% annual rate. Personal consumption, which encompasses all forms of personal spending, could well have advanced at a similar rate in Q2, which would mark only the fourth time in 10 years that personal consumption has a “4” handle.
Implications of strong U.S. consumer spending
The retail sales data therefore make the case for a continuation of the roughly 2% growth rate in the U.S. since the economic expansion began seven years ago. In fact, forecasting growth near 2% becomes easy since personal consumption has advanced at a 2.9% pace over the past seven quarters and data for personal income have been holding up and trending around 4% for the past two years. (Personal income includes wages and salaries plus other forms of income, such as dividends and interest, as well as rental and proprietorship income.)
While favorable for risk assets, in and of themselves the retail sales numbers are somewhat negative for interest rate risk. The report incrementally increases the chance of a Fed rate hike in 2016 by bolstering the Fed’s confidence in its outlook and in attaining its dual objectives on growth and inflation.
Look for the Fed to acknowledge the recent strength in consumer spending in the upcoming Federal Open Markets Committee (FOMC) statement on 27 July. Afterward, Fed officials are also likely to point to consumer spending strength as a means of maintaining optionality for future rate hikes. Even if they never use it owing to concerns about international events and the durability of economic activity, they will be keeping the rate-hike narrative alive.