March 15, 2017
Retail sales rose 0.1% in February after rising 0.6% in January after having climbed a solid 1.0% in December. During the course of the past year sales have risen 5.5%.
Sometimes sales can be distorted by changes in autos which tend to be quite volatile. In this particular instance unit auto sales were essentially unchanged in February but the trend is clearly upwards. Keep in mind that existing home sales are selling at the fastest rate thus far in the cycle. Consumers do not purchase homes and cars — the two biggest ticket items in their budget — unless they are feeling confident about their job and the future pace of economic activity.
Fluctuations in gasoline prices can also distort the underlying pace of sales. If gas prices rise, consumer spending on gasoline can increase even if the amount of gasoline purchased does not change. Gasoline sales rose 2.3% in January which appears to largely reflect an increase in gasoline prices and not any particular change in the volume of gasoline sales.
Perhaps the best indicator of the trend in sales is retail sales excluding the volatile motor vehicles and gasoline categories. Such sales rose 0.2% in February after having risen 1.1% in January after having climbed 0.2% in December. In the last year retail sales excluding cars and gasoline have risen 4.2%.
While there has been a lot of disappointment about earnings in the traditional brick and mortar establishments (like Macy’s, Sears, K-Mart, and Limited) the reality is that they need to develop a better business model. The action these days is in non-store sales where have been growing rapidly. Consumers like the ease of purchasing items on line. With on-line sales having risen a steamy 12.9% in the past year, their share of total sales has been rising steadily and now stands at 89% of fall general merchandise sales. That percentage has risen 10.0% (from 79%) at this time last year.
On balance consumer spending on goods seems to be holding up well and should climb at about a 2.5% pace in both 2017 and 2018.
Later this year we expect cuts in both individual and corporate income tax rates to give the economy a boost. Firms will be able to repatriate earnings to the U.S. at a favorable 10% tax rate. And Trump promises to eliminate all unnecessary, overlapping, and confusing Federal regulations. These policy changes should boost the potential GDP growth rate from 1.8% today to 2.8% within a couple of years. .