Evidence Consumer Spending is Bouncing Back
June 15, 2015 — In 2015, retail sales data has been surprisingly soft given the boost consumers were expected to receive from lower gasoline prices. After five straight months of coming in below expectations, Thursday’s report on retail sales for May finally provided some encouraging evidence that the widely-anticipated second quarter rebound in economic activity might be taking hold. May retail sales rose by 1.2% and the prior two months were revised up by a net 0.6%. Sales excluding autos, gasoline and food rose a still healthy 0.8% on the month. After the upward revisions, retail sales in the three months including May rose at an annualized 5.1% rate versus the prior three months, indicating some solid if not spectacular momentum in consumer spending. Year-over-year retail sales excluding gasoline were up 5.2%. The gains on the month were broad-based and strength in building materials confirmed other evidence of a strong housing market. The most surprising weakness in the report was spending at restaurants, which had been doing well in recent months. Some analysts have pointed to an early Memorial Day weekend as providing a boost to May’s numbers, but data from Applied Predictive Technologies indicates sales were down 0.7% over the holiday weekend versus last year. In all, the May retail sales figures and upward revisions to the March and April numbers are solid evidence that consumer spending has been bouncing back, albeit later and less robustly than many expected.
U.S. equity markets remained in a tight range with the S&P 500 gaining all of 0.08% in the past week. Upward pressure on interest rates was a catalyst for big shifts in relative sector performance, with the financial sector being a standout as it approaches its 2014 highs while interest rate sensitive groups such as utilities have continued to lag. Events in the Greek bailout drama appear likely to dominate headlines in the coming week with news this weekend that negotiations appear to have broken down over the Greek government’s demands for debt forgiveness. Although Greece represents a tiny portion of global GDP, a potential exit from euro could create extreme market volatility with somewhat unknowable consequences. Beyond short-term volatility, the most concerning development would be a sharp tightening of financial conditions in Europe which could severely erode the optimism that has surrounded the ECB’s quantitative easing program and signs of increased bank lending. Aside from Greece, the Fed’s policy announcement and Fed Chair Yellen’s press conference this Wednesday, will be closely scrutinized for indications the Fed is laying the groundwork to increase rates as early as September. Despite recent strength in the labor market, the market remains very uncertain over the near-term direction of Fed policy.