Goodbye to the "Soft Patch"


By Michael Englund It appears the U.S. consumer may not have heard about the "soft patch" in the economy. That's evident in the government's retail sales report for April, released May 12. Overall retail sales surged 1.4% -- well above economists' median forecast of a 0.7% rise -- and 1.1% excluding autos, vs. the median forecast of a 0.5% increase.

Not only was the headline April sales figure much stronger than expected, but back data were also revised higher. March's overall gain was revised higher to 0.4%, from the 0.3% increase reported originally. The March ex-autos component was revised to a 0.2% increase, from a prior 0.1% gain. If we exclude both autos and gas, the index rose a healthy 1.0% in April.

Together, this left the overall retail sales level 0.8% higher than what we at Action Economics had forecast, and the ex-auto aggregate 0.6% higher than forecast.

UPWARD BUMP. As expected, the gasoline and vehicles and parts components revealed strength, with respective gains of 2.5% and 1.9%. But the ex-auto and gas aggregate still rose 1.0%, following an unchanged reading in March, led by a 2.8% gain in clothing, a 1.5% increase in general merchandise, and a 1.2% gain in building materials.

Further, the March figures imply an upward bump in first-quarter consumption growth, to 3.6% from 3.5%, and a solid 4% growth clip in the second quarter. This should follow a slight moderation in consumption growth in Q1, to the 3.6% area, following a likely 0.1% upward revision given today's March data.

Ultimately, the April retail sales data reveal that the perceived soft patch in March was little more than a minor wiggle that may have reflected a negative seasonal impact from the early Easter holiday. We at Action Economics have bumped up our first-quarter consumption growth forecast to 3.6%, from the 3.5% gain revealed in the "advance" GDP report for the quarter, and we have raised our first-quarter gross domestic product forecast to 3.9% from the government's advance 3.1% estimate.

EYES ON THE FED. We have bumped up our first-quarter gross domestic product estimate to 3.9%, though it remains possible that the retail-inventory data for March will show some offsetting correction to the strength in retail spending.

The only downside risk to the first quarter GDP figure is if the retail inventory data for March, to be reported on May 13, reveal some offsetting downside correction to the strength in spending. For the second quarter, real consumption is now poised for a solid 4% growth clip, and there's significant upside risk to our 3.5% second quarter GDP forecast.

As for the monetary policy implications, the stronger-than-expected retail-sales numbers, following the narrower trade report on May 11, help put the final nail in the soft patch's coffin. That will allow the Federal Reserve to maintain its current pace of policy tightening. We forecast a steady stream of rate hikes through the year, with the Fed funds target rate reaching 4% by yearend. Englund is chief economist for Action Economics


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