U.S. retail sales in June point to consumer optimism

By Staff, with files from The Associated Press | July 16, 2018 | Last updated on July 16, 2018
3 min read

U.S. retail sales rose at a solid pace last month despite higher prices and modest wage gains, a sign of underlying consumer optimism and potential strong GDP growth.

The Commerce Department said Monday that sales at retailers and restaurants increased 0.5% in June, following a big 1.3% gain the previous month. May’s figure was revised sharply higher from an initial estimate of 0.8%.

Americans are confident about the economic outlook, with the unemployment rate near an 18-year low, and the economy accelerating after a sluggish start to the year. Headline retail sales rose 6.5% from a year earlier, the fastest annual pace in five years.

Still, some of the spending increases, such as gas station sales, simply reflect higher prices. Excluding auto dealers and gas stations, sales rose 0.3% in June.

Home and garden stores reported a strong 0.8% sales gain, which was likely lifted in part by more expensive lumber. The Trump administration imposed tariffs on some lumber imports from Canada last fall.

With consumer spending strong, most economists believe that growth will jump to a 4% to 4.5% annual rate in the April-June quarter, which would be the strongest in four years. That would follow just 2% growth in the first three months of the year.

Katherine Judge, CIBC economist, says in a report that today’s data confirm consumers’ role in supporting above-4% GDP growth in Q2. “Helped by the lagged effects of tax cuts feeding through to household spending along with wage increases, consumers appear resilient in the face of higher gas costs and interest rates, which we don’t see denting consumption until the end of the year,” she says.

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However, Derek Holt, vice-president and head of capital markets economics at Scotiabank, says June’s flat 0.3% reading hands off to the next quarter “on somewhat weakened terms” when compared to front-loaded growth earlier in the quarter. For example, April retail sales represented a 0.5% increase.

The monthly difference “adds to concern that the Q2 acceleration was just a burst of pent-up demand from Q1 that is not to be extrapolated,” he says in a report.

“Markets were generally little affected by the release,” he adds.

Business investment and potential threats

A survey of business economists found that most companies expect their sales to rise in the coming months and that they plan to raise pay to attract and keep workers. The proportion of businesses planning to raise pay was the largest in roughly 35 years.

Still, most of the respondents to a survey by the National Association for Business Economics (NABE) said that the Trump administration’s corporate tax cuts last year have yet to affect their plans for hiring and investment. The administration has sold the tax cuts as an incentive for companies to invest more in plant and equipment.

Nearly two-thirds of companies in the NABE survey said that the administration’s trade policies hadn’t changed their hiring or investment plans.

There are some threats on the horizon. Rising prices for gas, cars and medical care have boosted inflation in the past year to a six-year high. That has offset modest wage gains, leaving workers with flat pay in the past 12 months after adjusting for price changes.

The erosion of purchasing power could worsen if President Trump follows through on a threat to impose tariffs on US$200 billion of Chinese imports, including consumer items such as hats, handbags and furniture. Those duties would follow tariffs on US$34 billion of Chinese imports earlier this month, as well as import taxes on steel and aluminum from Europe, Canada, China and other countries.

Read: Exporters more confident, despite impact of NAFTA talks: EDC

But a quarter of farmers, manufacturers and construction companies surveyed said they had delayed making new investments because of the tariffs and retaliatory measures by China, Europe and other trading partners.

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Staff, with files from The Associated Press

The Associated Press is an American not-for-profit news agency headquartered in New York City.