U.S. May Retail Sales Beat Expectations

Americans shopped more online; splurged on clothes and sporting goods

U.S. retail sales rose strongly in May 2016 as Americans splurged on automobiles and a range of other goods, despite higher fuel prices and a decline in corporate profits. This suggests that the U.S. economy was well on a recovery path despite a slump in new job additions. According to the U.S. Department of Commerce and as reported by Reuters on June 14th, 2016, retail sales in May 2016 grew 0.5% from the prior month to a seasonally adjusted $455.64 billion. Retail sales for April 2016 were unrevised at a 1.3% gain, the strongest growth since March 2015. The latest data suggests that consumer spending, which accounts for two-thirds of the U.S. economic output, is being driven by strong consumer demand.

Strong consumer demand seen

Nine of the 13 major categories showed increases in demand in May 2016 from April 2016, led by a 1.3% gain in non-store retailers, which includes purchases on Amazon.com Inc. (NASDAQ: AMZN). Online sales grew 12.2% from a year earlier, outshining every other sector of retail tracked by government agencies. Purchases of motor vehicles and parts rose 0.5% in May 2016, and spending at gasoline stations grew 2.1%. Fuel prices were higher in May 2016, but remained below levels seen in May 2015, according the U.S. Energy Information Administration. Retail sales excluding motor vehicles rose 0.4% from April 2016. Excluding gasoline, sales were up 0.3%. Excluding both categories, sales increased 0.3% in May 2016. It is pertinent to note that the above retail sales data are adjusted for seasonal variations, but not for price changes.

Sales at sporting goods, books and music stores rose 1.3% in May 2016, and restaurant and bar sales advanced 0.8% as compared to April 2016. Clothing-store sales also increased 0.8%, but declined as compared to May 2015. Sales at general merchandise stores, including department stores, fell 0.3% in May 2016 and are down 0.7% from May 2015. However, households cut back on purchases of building materials and garden equipment, as well as furniture. These categories comprise core retail sales and correspond closely with the consumer spending component of gross domestic product. These components grew 0.9% in April 2016. Economists had forecast both overall retail and core sales gaining 0.3% in May 2016.

Source: US Department of Commerce
Source: US Department of Commerce
Source: US Department of Commerce
Source: US Department of Commerce

Compared with a year earlier, overall sales grew 2.5% in May 2016, above the annual rate of inflation of about 1% in 2016, as measured by the consumer-price index.

Inflation starting to stir

In a separate report, the U.S. Department of Labor said that import prices increased 1.4% in May 2016, the largest rise since March 2012, after advancing 0.7% in April 2016. Between May 2015 and May 2016, import prices fell 5%, the smallest decline since November 2014, signaling the weakening of the drag from a strong dollar and lower oil prices. The signs of healthy domestic demand and rising import inflation could prompt the Federal Reserve to hike rates in July 2016, if the employment rate improves.

Boost to Q2 FY16 growth

The fairly strong May 2016 retail sales report prompted the Atlanta Fed to raise its Q2 FY16 GDP growth estimates by three-tenths of a percentage point to 2.8%. The GDP estimates for Q2 were earlier pegged at around a 2.5% annualized rate. The economy grew at a 0.8% rate in Q1.

On the other hand, a slowdown in employment gains in May 2016 stirred concerns about the health of the U.S. economy. However, data on first-time applications for unemployment benefits suggests labor market strength remains intact.

Job creation paints a worrisome picture

Job creation tumbled in May 2016, with the economy adding just 38,000 positions. The U.S. Department of Labor reported that the headline unemployment fell to 4.7% during May 2016.

Source: US Department of Labor
Source: US Department of Labor

Q2 consumer spending predicted to grow

Based on May’s healthy growth in retail sales, economists have predicted that consumer spending in Q2 FY16 may grow at an annualized rate of 3%-4%. The robust retail sales are also helping businesses reduce an inventory overhang, enabling them to order more goods from manufacturers and thereby boost production.

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