Consumers say they’re gloomy, but why are they still spending?
A surprising report from the Commerce Department today, which indicated that seasonally adjusted nominal sales for retail trade and food services were 1% higher in May compared with April. The new estimates of March and April sales (in red in the figure below) were also revised substantially up from the previous (blue) estimates that had been reported last month.
Although a 1% monthly gain would translate into a 12% annual rate if maintained, the newly revised April numbers are still barely above the values last November in nominal terms. Calculated Risk notes that the year-on-year comparisons, when adjusted using an anticipated PCE deflator, remain negative even with the strong new estimates.
With today’s retail sales report, forecasters at Morgan Stanley have scrapped their longstanding call for the economy to shrink in the current quarter. The firm, whose continuously updated estimates of quarterly real GDP are closely watched, now sees it expanding at an annual rate of 0.5% in the current quarter, a shift from the previous call of minus 0.2%. This was primarily due to the stronger than expected retail sales report which led the firm to revise up its estimate of personal consumption growth to 1.6% from 0.2%. The firm said it also expects first quarter GDP growth to be revised up to 1.2% from 0.9%.
Economists David Greenlaw and Ted Wieseman confess to puzzlement at the strength in May and the upwardly revised months of March and April. “We doubt that the tax rebate checks had much impact on this report. Indeed, from an arithmetic standpoint, most of the upward adjustment to our [second quarter] estimates reflected the revisions to March and April– and, distribution of the checks did not even start until the end of April…. So where is all this spending coming from? We do not have a good answer to this question. The fundamentals still seem quite negative– income growth is moderating in conjunction with a deteriorating labor market, the wealth effect has swung from a source of support to a significant headwind, and every $1 rise in the price of a gallon of gasoline reduces discretionary spending power by about $120 billion (on an annualized basis)…. While the rebate checks should provide some noticeable support for the consumer over the next few months, we doubt the latest readings on retail sales can be sustained for too much longer.”
Phil Izzo collects some more pondering, but no definitive explanation, from other economists.