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Vehicles and Gasoline Drive Spending

RFP
Retail sales jumped more than expected, 1.6% in March. The rebound marked the largest monthly gain in a year and a half, welcome news given the pullback in spending that we saw in the December through February period. Overall gains were buoyed by a jump in vehicle sales - expensive SUVs accounted for the majority of the increase - and a surge in spending at gasoline stations. The downside was that the 3.5% monthly bounce in spending at the gas pump was more than offset by an increase of almost 30 cents per gallon in average gas prices for the month; e.g., spending on gasoline fell,after adjusting for inflation.)

Prices at the pump continue to trend up in April, which could put a damper on spending in low-wage households as we move into Spring. The good news is that these households are finally seeing wage gains; the bad news is that increases in gasoline prices must be added to their commuting costs.

Core retail sales, which strip out the volatile vehicle, parts and gas station sales, posted a robust 0.9% gain for the month, after being revised down a tick for February. A thaw in the weather after the polar vortex helped to buoy spending on everything from clothing to food at home and at restaurants. Online retailers also saw a nice increase. Traditional department stores continued to suffer as mall traffic was lackluster, even in locations with more entertainment experiences to compliment shopping. The move from bricks to clicks continues with more store closures reported during the first quarter of 2019 than during all of 2018.

Discounts appear to be accelerating in April if my travels past the main shopping streets are any indication. The number and size of sales in the windows of retailers increased compared to what I saw a year ago. The later placement of Easter could be a problem as it is delaying some of the spending that retailers with a large overhang of inventories were counting on for Spring.

Spending at building and gardening stores was lackluster in March. Heavy floods in the Midwest triggered by a whole new version of climate change called the “bomb cyclone” likely delayed repairs and planting. Those numbers should pick up a bit as we move into Spring. Mortgage applications for both refinancing and new home applications picked up in March and early April when fence sitters jumped to take advantage of a drop in mortgage rates. That should help boost spending on remodeling and repairs in May and June.

Consumer confidence and sentiment surveys have moderated from the levels of 2018 but remain on solid footing. The economy is slowing, not collapsing.

Bottom Line
Gains in March only partially offset the weakness we saw early in the year in terms of consumer spending. The slowdown in consumer spending will be evident in the GDP figures, which are slated to be released for the first quarter late next week. The offset is the overhang in inventories, which will keep GDP growth close to the pace that we saw in the fourth quarter. Whittling down those inventories will be subtracted from growth down the road. There is nothing in this data to cause the Federal Reserve to change course.

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