Consumer Resilience = Fed Headache

Retail sales jumped 0.9% in April, buoyed by a rebound in vehicle sales. Data for the previous two months was revised up markedly, underscoring the acceleration in domestic demand between the fourth and first quarters.

Gains were broad-based and enhanced by a surge in prices. Vehicle prices jumped again in April as dealers sold everything that was delivered. North American vehicle production held up better than production in Europe and Asia in the recent months. Supply chain disruptions due to the war in Ukraine and an idled chip plant in Japan were harder on foreign producers. Delays due to lockdowns in China are still ahead of us.

A return to malls and in-person shopping helped buoy spending. Traditional retailers and niche clothing stores outperformed big-box discounters and warehousing clubs. Consumers kicked up their heels, traveled and spent more at restaurants and bars. A later-than-usual Easter holiday spread out the spring breaks. Spending online also came back and was revised up after showing declines in recent months.

Gasoline station sales fell, although not as fast as prices at the pump last month. That goes with the increase in travel and tourism we saw during the month.

Spending at building and garden centers edged lower. A colder-than-usual spring and some cooling of demand in the remodeling market dampened gains. Google searches for do-it-yourself projects have plummeted in recent months.

Spending at grocery stores fell both before and after adjusting for inflation. This is worrisome as it hits those who can afford it least. Food prices are also among those that the Federal Reserve has the least control.

Earlier data on consumer credit revealed a surge in recent months. The savings amassed during the pandemic is blunting the blow of inflation along with a surge in employment. We have more than two million more paychecks today than we did at the start of the year; that is equivalent to what would have been a very good year of employment gains in the 2010s over the course of months.

The control for retail sales, which feeds directly into the GDP data, jumped 1% in April, a bit slower than March. That feeds directly into real GDP calculations and suggests that consumer spending slowed modestly at the start of the second quarter after accelerating in the first quarter. The resilience of the consumer is bad news for the Federal Reserve, as it intensifies the need to raise rates.

Bottom Line
Vehicle sales added to the overall gain in retail sales but gains were more broad-based than vehicle sales alone. That strength only reinforces the Fed’s resolve to raise rates rapidly. There are no doves left at the Fed; some within the ranks of the Fed, including Chairman Powell are admitting we may need to feel some pain - a rise in the unemployment rate - to douse the flames of inflation in 2022 and 2023. Today’s retail sales report will only reinforce the argument for more aggressive rate hikes. Powell would not take 75 basis points off the table in a recent interview on monetary policy.

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