BofA Merrill Lynch Global Research A US Economics Report – Wednesday, 13 March 2013
Retail sales surprised on the upside
Retail sales jumped 1.1% in February, while “core control” (ex-autos, building materials and gasoline) increased 0.4%. This shows resiliency on the part of the US consumer, given the headwinds in February, including higher taxes, delayed tax refunds, rising gasoline prices and poor weather conditions. The tailwinds, including stronger job growth and wealth appreciation, are seemingly stronger than we had believed. While we continue to look for softening in coming months from the lagged impact of fiscal cuts, we must acknowledge better momentum from the consumer. We are now tracking 2.6% for Q1 GDP, up from our prior tracking forecast of 2.2%.
Headline sales boosted by gasoline and building materials: Total retail sales jumped 1.1%, as higher gasoline prices led to a 5.0% increase in spending at service stations. Building material sales also increased 1.1%, likely related to rebuilding from Hurricane Sandy. Auto sales also increased 1.1%, as demand is boosted, in part, by greater access to credit.
Core control holding strong: After netting out autos, building materials and gasoline sales, core control sales increased 0.4%. For January, the data were revised up to show a gain of 0.3% from 0.1%. There was broad-based spending, with general merchandise sales up 0.5%, food stores up 0.8% and clothing up 0.2%. Spending at non-store retailers (online) jumped 1.6%, continuing to show the secular shift toward internet stores.
Consumer lessons: We can learn two lessons from this data: 1) consumers have greater support through labor income and wealth appreciation, which has also led to greater confidence, and 2) consumers may be willing to accept a lower saving rate for a period of time. The saving rate collapsed to 2.4% in January, the lowest level since prior to the crisis, and after today’s retail sales report, it appears consumers did little to build back savings in February.
Forecast risks: One of our key calls is that fiscal austerity would result in weaker consumption; so far, this does not appear to be the case. But, we think there are lags. Taxes increased in January and consumers will receive another blow in April, when the sequester kicks in. The risk, however, is that the weakening will not be as severe as we have forecasted. In order to get our forecast for 1.2% real consumer spending in Q2 and, hence, 1.0% GDP growth, we would need to see negative or flat core control retail sales in each of the next four months. The risk, therefore, is to the upside of our 1.0% GDP forecast for Q2.
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