The U.S. Commerce Department reported this morning that retail sales for May fell 1.2%, a disappointment given that analysts had been hoping for a modest gain. It knocks some of the good feel from Federal Reserve Chairman Bernanke’s testimony on Thursday before the House Budget Committee. But, that said, the May report is not the end of the recovery nor a major deterioration in consumer’s propensity to spend. It is, most likely, a reflection of post stimulus malaise–the stimulus being the many incentives that were in place to get consumers to open up their wallets.
On a good note, the Michigan survey of consumer sentiment improved, and while that is a lagging indicator most likely reflecting stock market gains of a few months ago, it’s an improvement nonetheless.
Here us smart quick take from Ian Shephardson, chief economist at High Frequency Economics on this morning’s weak retail sales number:
The key culprit here is the building materials component, where sales plunged a gigantic 9.3%, following enormous increases totaling 17.1% in the previous two months. Excluding building materials and the other erratic components – autos, gas and food – core sales were up a tenth in May, following a 0.2% decline in April. These two months were much weaker than the previous two, when this measure of core activity rose by an average of 1.1% per month. This strong performance likely reflected a combination of tax refund spending, post-winter storm repair spending and a boost from tax rebates for energy efficiency appliances. With these effects all now gone, the weaker underlying picture is revealed. The drop in May sales does not guarantee an outright decline in real consumption for the month but it certainly makes it much more likely. Q2 consumption spending will still likely rise by 2-to-2.5%, thanks to basis effects, but if these recent trends continue into Q3 then you can expect much slower growth.