Consumers Step Up & Out in Style

Retail sales surged 9.8% in March and more than reversed the upwardly revised 2.7% drop in February. That is the largest single monthly gain since May of 2020 when we were emerging from the first round of lockdowns last year.

Several factors came together to produce those extraordinary gains: A third round of richer stimulus checks, a catch-up in spending and repairs following unusually harsh winter weather and power outages in the oil patch, the ongoing boom in housing, a lifting of restrictions on indoor venues and sporting events, a sharp acceleration in hiring (we came close to bringing back a million workers in March) and a surge in travel as older adults booked vacations following vaccinations and young adults flocked to Spring Break destinations. Miami Beach was forced to invoke strict curfews to contain the damage and risk of contagion triggered by pandemic-fatigued young people.

Gains were robust in every major category with the exception of spending at grocery stores. Spending on vehicles, electronics and appliances, clothing, sporting goods, at garden and building material stores, traditional department stores, restaurants, bars and gas stations all rose at a double-digit rate. Spending at gas stations got an extra lift from a 9.1% surge in prices at the pump, but that did little to curb consumer enthusiasm after nearly a year of staying inside.

Core retail sales, which feed directly into the calculation of real GDP growth for the quarter, rose 6.9% during the month. Core retail sales rose at a 27.5% annualized pace in the first quarter before adjusting for inflation, the strongest pace since last summer. That should push real GDP into the high, single-digit range in the first quarter after nearly stalling in the fourth quarter. Some of the strength in consumer spending will be offset by a sharp drop in retail inventories and a widening of the trade deficit during the quarter. We recovered as many of our European trading partners entered new lockdowns.

Separately, initial unemployment claims plummeted by nearly 200,000 to 576,000 in the week ending April 10. Special pandemic unemployment claims also moved lower. We are now at the lowest level of unemployment claims since the onset of the crisis, which suggests the momentum we saw in hiring in March continued into early April.

The number of those on extended benefits also continued to fall during the most recent week. Some of that reflects workers returning to work after a long spell of unemployment; others have simply run out of extensions. The latter is more worrisome and consistent with the data we have on the long-term unemployed, whose ranks continued to swell despite a sharp improvement in employment in March. Claims remain elevated relative to other recessions but the trend is in the right direction.

We are currently picking the low-hanging fruit when it comes to job gains. The faster we regain what we lost, the better. Job gains are expected to moderate as we move through the summer and into the fall. The concern is how many jobs were permanently displaced by the shift to work-from-home and the widespread adoption of existing technologies that shift precipitated. Many workers who once relied on mass transit to downtown locations may not be able to easily accept jobs that have moved to the suburbs. Others may have trouble upskilling fast enough to work in the new jobs that are being created. The challenges are even greater, given the educational attainment lost to the crisis. Manufacturers are looking to train people who have math skills, an area where test scores suffered the most from the shift to online schooling.

Bottom Line
Vaccinations and stimulus checks worked to unleash the pent-up demand and more aggressively recoup jobs lost to the crisis. We are still a long way from where we were before the onset of the crisis but moving in the right direction. I will reserve my champagne for the moment that employment has more fully recovered but will sleep a little better tonight, knowing that day is nearing.

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