Overall U.S. retail sales rose in April but the key metric for consumption and gross domestic product fell sharply suggesting that a consumer led recovery from the first quarter's weak economic growth is not at hand.
Purchases climbed 0.4 percent on the month and March's sales were revised higher to a 0.1 percent gain from the originally reported 0.2 percent drop, according to the Commerce Department in Washington, D.C. on Friday. Economists in the Reuters survey had forecast a 0.6 percent increase. Sales were 4.5 percent better on an annual basis in April. From 1992 until the beginning of 2017 retail sales averaged a monthly gain of 0.36 percent.
Treasury bond prices rose on the news with the 10-year off 6 basis points in yield to 2.33 percent and 2-year down 4 basis points to 1.29 percent as of 11;47 am in New York.
Retail sales excluding gasoline, food services, automobiles and building material, also called 'core retail sales’ rose 0.2 percent in April following an upwardly revised 0.7 percent gain in March. They had been expected to increase 0.4 percent. The initial March figure had been 0.6 percent.
This metric most closely mimics the consumption component of the government’s calculation of GDP. Consumer spending accounts for about 70 percent of U.S. economic activity.
The 0.3 percent annualized rate of core spending increase in the first quarter, the slowest since the last quarter of 2009, is largely responsible for the anemic 0.7 percent annualized GDP expansion, business investment had seen a modest rebound.
Any decline in consumption in the second quarter from the already low rate in the first will make it difficult for the economy to accelerate when its largest sector is stagnant.
The Federal Reserve has long predicted that the tightening labor market exemplified by the decade low unemployment rate of 4.4 percent, would provide a boost to wages as employers compete for increasingly scarce workers, which in turn would give consumers more discretionary income and spending power.
But this has not happened. The year on year increase in average hourly earnings dropped back to 2.5 percent in April at the upper end of the 2.0-2.8 percent range it has occupied since the financial crash and recession. This is barely above the 2.2 percent CPI rate in April and well below the average annual wage increases in the years before 2008.
The U.S. central bank is widely expected to hike its base Fed Funds rate 0.25 percent at its June 13-14 meeting despite the weak first quarter GDP. It would be the second of the three increases this year projected by the FOMC in December. Bank officials have said that they view the first quarter economic rate as a temporary phenomenon.
The updated second quarter GDP estimate from the Atlanta Fed GDPNow was unchanged at 3.6 percent today.
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Chart: St. Louis Federal Reserve