Strong US retail sales underscore economy’s resilience despite Iran war

WASHINGTON - US retail sales increased more than expected in May, with households boosting purchases of motor vehicles even as they paid more for petrol, but a slowdown is likely as the cushion from larger tax refunds against higher prices diminishes.

The fourth straight month of strong retail sales reported by the Commerce Department on June 17 added to a pickup in job growth in highlighting the economy’s resilience despite the oil price shock from the US-led war with Iran.

That data, together with rising inflation, have raised the chances of an interest rate hike from the Federal Reserve, though economists argued that the bar for policy tightening is high since oil prices have eased.

They expected the US central bank to later on June 17 leave its benchmark overnight interest rate in the 3.50 per cent to 3.75 per cent range, but ditch the Fed’s easing bias.

“The strength of May’s retail sales report and the acceleration from April’s spending pace will raise more yellow flags at the Fed as it tries to tamp down consumer inflation pressures,” said Scott Anderson, chief US economist at BMO Capital Markets.

Retail sales jumped 0.9 per cent in May after a downwardly revised 0.4 per cent gain in April, the Commerce Department’s Census Bureau said on June 17.

Economists polled by Reuters had forecast retail sales, which are mostly goods and are not adjusted for inflation, would rise 0.5 per cent after a previously reported 0.5 per cent increase in April. Sales advanced 6.9 per cent on a year-over-year basis in May.

Some of the rise in sales last month reflected higher petrol prices, with receipts at service stations accelerating 3.4 per cent after rising 2.4 per cent in April.

Service station sales soared 26.5 per cent on a year-over-year basis in May.

Petrol prices surged to four-year highs as a result of the war in the Middle East. They have since retreated, with the national retail average slipping below US$4 (S$5.1) a gallon this week for the first time since April.

The US and Iran on June 14 said they had agreed on terms to end ​the war and reopen the Strait of Hormuz. When adjusted for inflation, retail sales increased 0.4 per cent, economists estimated.

Tax refunds have combined with a stock market rally to underpin spending, which also has come at the expense of savings.

Consumers hunting for bargains

Bank of America Institute said an analysis of internal data suggested that “consumer financial health remains strong, with no clear signs of households resorting to borrowing to support spending”, but also noted that “some consumers are making more trips to the store, perhaps on the hunt for bargains”.

Sales at auto dealerships rebounded 1.2 per cent. Sales at non-store retailers, which include online retailers, jumped 1.5 per cent. Receipts at furniture stores increased 1.0 per cent. There were increases in sales at health and personal care stores, clothing as well as sporting goods, hobby, musical instrument and book stores.

But receipts at food services and drinking places, the only services component in the ​report, dipped 0.1 per cent. This category is considered a key measure of household finances. Sales at building material, garden equipment and supplies dealers were unchanged, as were those at food and beverage stores. Electronics and appliance store receipts fell 0.5 per cent.

Retail sales excluding automobiles, petrol, building materials and food services increased 0.7 per cent in May after an unrevised 0.5 per cent advance in April. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.

The momentum in retail sales is, however, unlikely to be sustained. The tax filing season is over and a big chunk of the refunds has been depleted. Inflation has outpaced wage growth for the past two months and the saving rate dropped to a four-year low in April.

“Consumption regained some momentum over the spring, but the sugar rush from bigger-than-usual tax refunds will wear off soon,” said Samuel Tombs, chief US economist at Pantheon Macroeconomics.

For now, consumer spending, which accounts for more than two-thirds of the economy, appears to be accelerating after slowing in the first quarter. The Atlanta Fed’s GDP tracker shows the economy growing at a 2.8 per cent annualised rate in the second quarter. The economy grew at a 1.6 per cent pace last quarter. REUTERS