Retail sales show the US recovery is in the bag

A strong showing in retail sales highlights the resilience of the US economy after earlier setbacks, and should give the Fed confidence to end its asset purchases sooner rather than later.

The few remaining concerns about the US economy were washed away overnight with retail sales rising strongly in March to offset a weather-affected start to the year. Nevertheless, household spending is set to be soft when GDP is released later this month but is widely expected to drive the US economy over the remainder of 2014.

Retail sales rose by 1.1 per cent in March, easily beating expectations, to be 3.8 per cent higher over the year. This follows growth of 0.7 per cent in February -- upwardly revised from an initial 0.3 per cent gain.

Offsetting the recent strength was a downward revision to the decline in January, leaving retail spending mostly unchanged in the quarter. Consequently, household spending is unlikely to contribute significantly to GDP growth in the March quarter, but is likely to boost growth considerably in the following quarter.


Graph for Retail sales show the US recovery is in the bag

Sales of motor vehicles accounted for around half of retail spending growth in March. Motor vehicle retailers were among the hardest hit by weather over December and January, with sales declining by almost 4.5 per cent. But since then those losses have been completely retraced, leaving retailers in a good position for the rest of the year.

The improved prospects for the household sector follow solid employment growth in March (How the US economy weathered the storm, April 7). Non-farm payrolls rose by 192,000 in March and job creation in January and February were revised up.

The unemployment rate remained at 6.7 per cent but the participation rate has climbed noticeably (albeit off a low base) since October. More recently, initial jobless claims fell back to their pre-crisis level.


Graph for Retail sales show the US recovery is in the bag

Other measures of the economy, such as the manufacturing ISM and consumer sentiment have also posted gains.

The US economy will take a hit in the March quarter but the adverse weather conditions that plagued the country earlier in the year appear to have had no long-lasting effects.

Analysts widely believe that the US economy will grow strongly over the remainder of 2014 -- an assessment I am more than comfortable with.

The recovery has proved once again that it is resilient: it can take a hit and get back on track quickly. Some analysts thought the government shutdown in October would prove disastrous -- it didn’t -- and similar sentiments were shared after a disappointing start to the year.

That resilience will give the Federal Reserve confidence as it continues to unwind its asset purchasing program. At its meeting later this month, it is all but certain to cut purchases by a further $US10 billion, and outward impressions suggest a strong determination to end its asset purchases sooner rather than later.

Retail spending was strong in March, offsetting earlier losses in December and January, but household spending is unlikely to contribute much to growth in the March quarter. Nevertheless, the prospects for the retail sector are promising and poor weather earlier in the year has had no lingering effects on the economy. The Fed will move ahead with confidence that the economy can stand on its own two feet.