Retail Sales Disappoint in April

Retail sales fell 0.2% in April, well below market expectations, after being revised up only 0.1% for March. Vehicle sales were particularly weak as pent-up demand has given way to replacement demand. Vehicle sales peaked in 2017. Rising prices at the gas pump were another hurdle for consumers. Spending at gasoline stations posted the largest increase for the month, rising nearly 2% after exceeding 3% in March.

Core retail sales, which strip out the volatile vehicle and gasoline station sales, dropped an even more worrisome 0.2% In April, after being revised down slightly for the month prior. Losses were largest in building and garden supply, and electronic and appliance stores. Unusually rainy spring weather exacerbated the weakness in spending on home repairs and gardening. Newly announced tariffs on Chinese imports are expected to hit electronics, most notably smartphones, later in the year. Earlier tariffs have already shown up in appliance prices; washers and dryers have both gone up in price in the wake of tariffs enacted last year. Moreover, those increases were seen in both foreign and locally produced goods, which underscores the upward pressure on prices that tariffs can have on domestic as well as imported goods.

Furniture sales were flat despite an increase in home sales in the first quarter. Home buying tends to be a major trigger to spending on everything from home furnishings to appliances and repairs. We hope to see a bit of a rebound later this spring. The concern is the role a full-blown trade war with China, which has yet to hit, could have on spending across the board.

The only bright spot was spending at traditional department stores, which jumped 0.7%. Sales remain in the red relative to a year ago, as store closures continue to mount. The shift from bricks to clicks continues, although it is notable that even online spending did poorly in April. We also saw a hit to bIg-box discounters as higher prices at the pump cut into spending there. One just can’t put lipstick on this pig. Some turnaround is expected later this spring, but escalating tariffs and trade tensions could limit those expected gains.

Geopolitical tensions are also an issue as concerns about a conflict with Iran have buoyed oil prices in recent weeks. Iran has become more aggressive in attempting to disrupt production at its competitors in the Middle East, like Saudi Arabia, in response to yet another round of sanctions. Weakness in the Chinese economy should provide an offset for the price of oil, but can’t stop the collateral damage of tariffs.

Bottom Line
Consumers are showing some signs of weakness despite ongoing improvements in the labor markets. Consumers at the low end of the income strata are particularly vulnerable to higher prices at the pump and the pending tariffs on China. Tariffs tend to be one of the most regressive taxes as they tax consumer spending instead of incomes. Some estimates suggest consumers have already paid more than $400 per household for the tariffs that were already in place in 2018. That wipes out the benefit of tax cuts and a good portion of the rise in wages we have seen for many lower wage households.

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