US: Retail Sales Continue to Post Strong Gains

US consumers have clearly not altered their spending habits significantly despite rising energy prices, which have weighed on real income in recent months. While a slowdown in retail sales had been expected in May, they instead posted a strong gain of 0.9%. Even excluding the impact of higher gasoline prices on service station sales, the increase reaches 0.7%, accelerating from the previous month (0.2%). Although consumer confidence has declined since February, sales excluding gasoline and autos still grew by nearly 2% over the same period.

Among retailers posting gains last month, auto dealers performed better than suggested by the new vehicle sales figures released earlier in the month. Some discretionary spending categories also delivered solid results, notably furniture stores and clothing retailers. Conversely, electronics stores, department stores, and food services registered declines.

Adjusted for price fluctuations, real sales show a marked acceleration, moving from stagnation in April (0.0%) to a 0.7% jump in May. This is clearly encouraging for real consumption this spring. Consumption had slowed in the first quarter, recording its weakest growth in a year. Barring an unexpected setback in June, it is now poised to rebound in the second quarter.

That said, consumer resilience remains striking. Household confidence has been relatively subdued since the onset of the conflict with Iran. Even beforehand, sentiment was not particularly strong, although it remained highly polarized along political lines. For the time being, US households appear to be looking past their concerns and continuing to spend. Given weak real income growth in recent months, this is coming at the expense of savings. The household saving rate has in fact declined significantly. It remains to be seen whether this relatively fragile situation can persist. Encouragingly, the decline in oil prices and at-the-pump gasoline prices observed since their mid-May peak should support real income starting in June. Stronger employment gains recorded from March to May also point in a favourable direction.

The strength of May’s retail sales is good news and once again underscores the resilience of US consumers and the broader economy. Supported in part by household spending, real GDP growth in the second quarter now appears likely to exceed that of the first quarter. It will be interesting to see how Federal Reserve officials, under new Chair Kevin Warsh, interpret these developments at the conclusion of today’s meeting.