Advance retail sales came in lower than anticipated at 0.4% where 0.6% was expected, following a 0.1% rise in March. Sales are now 4.5% higher than a year ago. Excluding autos, sales were also up 4.5% annually, and rose 0.3% in the month, when an increase of 0.5% was expected. The March non-auto sales were revised up to 0.3% from being unchanged. Motor vehicle and parts sales increased by 0.7%, after a decrease of 0.5%; they are now 4.4% higher than a year ago.
The most meaningful measure of retail sales activity excludes gasoline and auto sales (to negate the volatile influences of gasoline prices and auto financing incentives). Sales at gasoline stations increased by 0.2%, following a fall of 0.4% in March, and are 12.3% higher than a year ago. The strength in core sales was mainly focused at nonstore retailers (1.4%), electronics and appliances (1.3%), building materials and gardening supplies (1.2%), and health and personal care stores (0.8%). Any weakness in the month came from decreases at furniture and home furnishing stores, general merchandise stores, and clothing stores. Excluding gasoline and autos, retail sales were 0.3% higher on the month, following a 0.4% increase in March, and were 3.7% higher than a year ago. Lastly, non-auto, non-gasoline station sales, less building and gardening equipment, were 0.2% higher in the month and 3.1% higher annually.
Investors were particularly antsy about this month’s report as to whether or not the weakness experienced through the first quarter was continuing into the second. Earnings at many retailers have been disappointing and there is an ongoing concern that this sector is facing a perfect storm of structural headwinds—namely, continued pricing pressure from online retailers like Amazon and weaker demand from a consumer who may not be quite as healthy as a 4.4% unemployment rate might suggest. In reality, much of the slowdown during the first quarter seems to have been due to warmer weather (e.g., there was a 2.3% decline in household spending on “housing and utilities,” which accounts for 17% of PCE), delayed tax returns (due to new government efforts to reduce tax fraud), and what is called residual seasonality (i.e., the BEA has had a harder time in recent years seasonally adjusting first-quarter data, which has been significantly weaker than the other three quarters). As a result of all this, the Fed, in its last FOMC statement, referred to this weakness as “transitory,” and expects, given the solid consumer fundamentals, a pickup in growth in the following quarters. What does not look like it has been so transitory, however, has been the sustained slowing in auto sales. This weakness is a concern. Growth in auto sales has been particularly strong for a while now and demand may be satiated. Much of the previous strength has also been induced by very strong incentives issued by the financing arms of the car companies themselves who are keen to lower extremely high inventory levels. The danger here is that delinquencies on auto loans are starting to rise. Weaker auto sales will have a dampening multiplier impact on the rest of consumer spending. The bottom line is that today’s report is encouraging in that it shows some of the weakness in the last three months was clearly transitory, but while consumer are in decent shape, we need to keep a very close eye on auto sales.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.