Despite repeated predictions by economists of the imminent rescue of the U.S. economy by free-spending consumers, American households are acting as if the improving labor market and lower gasoline price are reasons not to splurge but to retire debt and save for a increasingly dicey future.
Retail sales were flat in April after a 1.1% increase in March that was larger than initial 0.9 percent release, according to the Commerce Department in Washington today. Analysts in the Bloomberg survey had forecast a 0.2 percent gain in sales. Purchases excluding automobiles rose 0.1 percent, well under the 0.5 percent estimate, though here also March sales were revised up, to 0.7 percent from 0.5 percent.
On the year sales gained just 0.9 percent, the fourth drop in annual growth in a row. It was also the weakest performance in this essential GDP category since October 2009.
The 'retail sales control group', the category that mimics the consumption segment of the government’s GDP calculation was flat in April, a substantial miss on the 0.5 percent forecast. Though the March increase was revised up to 0.5 percent from 0.3 percent, the spending charted by this gauge has only risen once in the past five months.
Consumers seem to have chosen to save any extra cash from the drop in gasoline prices and to pay down credit card balances rather than patronize Amazon or the local mall.
In the first quarter U.S. wage earners put aside an average of 5.5 percent of their disposable income. That is a 19 percent increase over the 4.6 percent saving rate in the final three months of last year and a 15 percent increase over the 4.8 percent rate for all of 2014. It approaches the 30 year historical average of 5.9 percent.
The choice to save rather than spend may reflect the history of stagnant wage compensation since the financial crisis. Although the annual gain in real average weekly earnings was 2.1 percent in March, since the beginning of 2009 it has been just 0.4 percent annually and since January 2012 only a marginally better 0.6 percent.
In the first quarter Americans reduced their card balances in two out of three months, cutting 556 million dollars from their outstanding debt. This might not seem like a great deal in a total outstanding credit card bill of $889.4 billion in March. But it is only the second negative quarter since 2011, which was the end of a three year period when consumers had reduced their outstanding revolving debt by 20 percent from $1021.2 in April 2008 to $832.4 billion by April 2011. The other negative quarter was the first in 2012 by $367 million.
The consumer’s apparent assumption that the 45 percent drop in the cost of a gallon of regular gasoline since the summer, from June’s high of $3.69, did not portend a permanent rise in discretionary income has been born out. Gasoline prices have risen 31 percent from the January low 0f $2.03, regaining 17 percent of the overall drop to yesterday’s $2.67 average.
This weakness in consumer spending and the lack of momentum in a year confidently predicted by the Fed and many others to be the year where the US economy finally breaks above 3 percent growth may make it difficult or impossible for the Federal Reserve to act on its intention of raising the Fed Funds rate for the first time since 2006.
If the economy is barely expanding, or worse slips into recession in the second quarter it is difficult to see how the governors justify a rate hike when inflation remains well below the central banks 2 percent target. The Fed's preferred measure of price changes, the core PCE price index registered just 1.3 percent March and is expected to be little changed in April.
American gross national expanded at an annualized rate of just 0.2 percent in the first quarter. And this will likely be reduced to -0.5 percent to -1.0 percent when the first revision is released at the end of this month.
Estimates for the second quarter are already dropping. The Atlanta Fed's GDPNow, which was the most accurate major forecast for the last quarter at 0.1 percent, is currently predicting 0.7 percent annual growth for the second quarter down from 0.9 percent earlier in the month.
Business investment spending has declined in six of the past seven months and government expenditures are flat. That leaves the consumer the only hope for rising GDP. If U.S. household spending is rolling over the economic outlook of the second quarter and the rest of the year darkens considerably.
Chief Market Strategist
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