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U.S. GDP worrywarts can breathe a sigh of relief. The American consumer is alive and well.
The U.S. Commerce Department's retail sales report for April, released Monday, showed a modest rise of 0.1 per cent from March – a relief, frankly, from March's worrisome 0.5-per-cent decline. Excluding the volatile autos and gasoline segments, retail sales were up a brisk 0.6 per cent.
When you consider that more than 70 per cent of U.S. GDP comes from personal consumption, it's easy to see why the retail trend matters a great deal. Its unsteady, up-and-down performance this year had raised some legitimate questions about the underlying health of the U.S. recovery. But the latest sales numbers, coming on the heels of last week's report from the International Council of Shopping Centers (ICSC) that chain-store sales surged 2.2 per cent in April from March, provide increased confidence that the rebound in GDP in the first part of the year has some legs on the consumer side.
Because the monthly retail sales numbers tend to be pretty volatile, they don't make for the best indicator for broader GDP strength; while the two typically trend in the same direction, the odd wayward month in retail sales is not atypical.
But the less closely watched ICSC chain-store report provides a more consistent indication of consumer strength. It is devoid of the autos and gasoline noise in the broader retail sales report, and with a handful of minor exceptions it has tracked quarterly GDP numbers remarkably closely over the past 25 years.
Yet in the first three months of this year, the typical relationship wasn't holding at all. According to the U.S. government's preliminary data, GDP growth rebounded in the first quarter to an annualized rate of 2.5 per cent from 0.4 per cent in the fourth quarter – even as chain-store sales slowed. One of them seemed to be sending off a false signal.
The economic doubters had good cause to believe that it was the preliminary GDP data that had overstated things. The expiration of the U.S. payroll tax holiday on Jan. 1 had resulted in an immediate hit of 2 per cent on every paycheque in America. When weak retail numbers rolled in, it was widely assumed that the tax hit had become an immediate drag on spending. Couple that with weak consumer credit growth – March recorded the smallest increase in eight months – and the fuel for spending growth would look to be running pretty dry.
But perhaps not. As BCA Research noted Monday, the drop in gasoline prices has freed up disposable income for other purchases. And the continuing recovery in the U.S. housing market, coupled with the stock market's gains, have boosted household net worth – a critical driver of consumer demand.
Those factors suggest April's retail strength might have some legs. Indeed, the ICSC forecasts that May sales will grow another 2 to 3 per cent from the April levels. If that proves accurate, the lukewarm outlook for second-quarter GDP growth could be headed for an upside surprise.
David Parkinson is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow him on Twitter at @parkinsonglobe.
David Parkinson