May 12, 2017 Reading Time: 3 minutes

Economic data released today paint a favorable picture of the economy and support a positive outlook over the next few quarters. Retail sales rose 0.4 percent in April following a 0.1 percent increase in March and a 0.2 percent drop in February. Both February and March were revised higher from initial estimates of −0.3 percent and −0.2 percent, respectively. The upward revisions should result in upward revisions to some consumer-spending components of first-quarter gross domestic product.

The April gain in retail sales was led by widespread increases in discretionary spending including a 0.7 percent gain in motor vehicle and parts sales, a 1.3 percent gain at electronics and appliance stores, a 1.2 percent jump in building materials, garden equipment, and supply stores (think Home Depot and Lowe’s), a 0.6 percent increase at sporting goods, hobby, book, and music stores, and a 0.4 percent rise at restaurants.

Among mixed-merchandise stores, non-store retailers (online shopping) posted yet another strong gain, rising 1.4 percent. Non-store retail sales now account for just over 10 percent of total retail sales and almost 15 percent of retail sales excluding vehicle and gas sales. General-merchandise stores continue to struggle as sales fell 0.5 percent for the month and are down 0.7 percent from a year ago.

Retail sales of consumer staples had a weak month, rising just 0.1 percent as food and beverage store sales fell 0.3 percent, overwhelming a 0.8 percent rise at drug stores and a 0.2 percent gain at gasoline stations.

Overall, the results for April combined with upward revisions to previous months suggest consumer spending remains well-supported by gains in jobs and income. The data point to likely upward revisions to the consumer-spending portion of first-quarter GDP and suggest that second-quarter consumer spending is starting off with solid momentum.

The positive outlook for second-quarter consumer spending is further supported by the increase in consumer sentiment in the first half of May reported by the University of Michigan. Consumer sentiment rose to 97.7 in early May from 97.0 in April. The increase is entirely attributable to a 1.3 percent increase in the Index of Consumer Expectations, the forward-looking component of consumer sentiment and one of the AIER Leaders. The expectations index rose to 88.1 from 87.0 in April, while the current-conditions index held steady at 112.7.

Consumer prices as measured by the Consumer Price Index from the Bureau of Labor Statistics rose 0.2 percent in April following a 0.3 percent drop in March. Over the past year, the CPI is up 2.2 percent. The major contributors to the increases in April and over the past year are energy prices and the price of shelter. Energy makes up about 7 percent of the CPI. It rose 1.1 percent for the month of April and is up 9.3 percent from a year ago. Both energy commodities and energy services (utilities) rose substantially.

Shelter costs account for 33.6 percent of the CPI and posted a 0.3 percent rise in April. Over the past year, shelter costs have risen 3.5 percent. Prices for shelter have been one of the steady components of rising prices over the long term. Shelter prices have risen at a 2.9 percent annual rate over the past five years and at a 2.7 percent annual rate over the past two decades.

Among the other key components of the CPI, food prices rose 0.2 percent on April and 0.5 percent from a year ago. Among the two major components of food prices, grocery store prices have been rising recently but are still down 0.8 percent from a year ago while restaurant prices rose 0.2 percent in April and are up 2.3 percent from a year ago.

The CPI excluding food and energy rose 0.1 percent for the month and is up 1.9 percent from a year ago, close to the 2.0 percent target the Fed has for the broader personal consumption price index. Core-goods prices fell 0.2 percent in April and are down 0.6 percent from a year ago. Core-goods prices are also down 0.3 percent at an annual rate over the past five years and up only 0.1 percent annualized over the past 20 years.

Core-services prices, which include shelter as well as medical care and education, continue to be the main sources of upward price pressure. Prices rose 0.1 percent in April and are up 2.7 percent over the past year.

Overall, the United States does not appear to be experiencing broad-based price pressures but rather pockets of concentrated price increases, particularly energy, shelter, and medical care.

Robert Hughes

Bob Hughes

Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.

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