Consumer spending has been soft in recent months, prompting some analysts to forecast trouble for the economy later this year. Perhaps, but looking through the monthly noise continues to paint an upbeat profile for retail sales. The growth rate has decelerated lately, but the year-over-year comparisons remain upbeat.
The stakes are high, of course. Consumer spending represents about three-quarters of economic activity in the US and focusing on the monthly reports looks worrisome. Sales slumped in February, marking the third straight monthly decline – the first trio of negative comparisons in three years, the US Census Bureau reported yesterday.
This could be the start of trouble for the business cycle, but it could just as easily turn out to be another temporary setback. One reason for thinking the weakness will pass includes the still-positive trend. The annual change in headline retail spending actually ticked higher last month, rising 4.0% vs. 3.9% for the year-over-year gain through January. The annual increases for retail spending excluding autos (and ex-food sales as well) also edged higher, suggesting that the core trend strengthened last month, albeit only slightly.
Pessimists are quick to note that the annual pace of retail growth is well off the recent high of 5.9% through last November. True, but expecting consumers to maintain that hot pace of spending was always a long shot. The worst you can say at this stage is that sales have decelerated to a moderate pace, but one that’s still healthy.
The fact that employment growth remains solid is no small reason for assuming that retail spending will continue to rise at a rate that keeps the broader economy humming. US companies added 287,000 jobs in February, the strongest monthly advance in almost two years. Meanwhile, the one-year trend in private payrolls firmed up to a 1.8% gain, the fastest rate in six months. Consumers have cut back on purchases lately, but the reason isn’t due to a stumbling labor market. That’s a powerful clue for thinking that retail sales will stabilize if not pick up in the months ahead.