At 8:30 A.M. (EDT) this morning, the investment community received a key report on the U.S. economy, and at first blush it appeared modestly disappointing. Specifically, the Department of Commerce reported that retail sales for the month of May rose 0.3%, falling slightly short of the consensus expectation for the period. However, the April figure was revised to show an increase of 0.5%, versus a preliminary report of a 0.1% gain.
A closer examination showed that when backing out the volatile auto component, retail sales rose by only 0.1% in May. The modest advance also raises the question in the minds of some economists as to just how formidable the GDP recovery will be in the second quarter after the economy contracted by 1.0% in the initial period of 2014. Given that the consumer sector is such a huge part of the GDP calculation—consumer spending accounts for roughly two-thirds of the nation’s economic output—the modest retail sales increase could be a marginal drag on second-quarter GDP.
Still, given the recent pickup in manufacturing and nonmanufacturing activity, as well as the marked improvement in the labor market (the nation has added more 200,000 new jobs in each of the last four months), we expect that the economy will rebound by a notable percentage in the rapidly concluding quarter. Too, the increase in the April sales figure gives us hope that the consumer will be spending during the fast approaching all-important vacation season.
All in all, while the retail sales data for May were not as high as we would have like to have seen, it does not change our view that current quarter will show a sharp rebound in the nation’s GDP and that growth in excess of 3.0% is very much achievable over the final six months of this year.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.