Consumer Pushing Fed to Sidelines

Today's retail sales report will keep the bond market on a slippery path downward.

Although sales were weaker than expected when revisions are included, sales momentum is positive. This will give GDP an upward bias for the current quarter, chiefly because GDP is calculated as the average of one quarter vs. the average of another, and January will start above the fourth-quarter average even before any new sales are considered.

The momentum seems likely to stay intact in early 2007, thanks largely to the decline in energy costs. The consumer needs no help from the Fed at present.

Retail sales increased 0.9%, two-tenths of a percentage point more than expected, but the two prior months were revised downward by a combined five-tenths. Excluding automobiles, retail sales increased 1.0%, five-tenths of a percentage point more than expected but one-tenth less than expected when revisions to past months are included.

Many are likely to forecast personal spending to have increased at a pace of at least 3.5% last quarter, which might be enough to give GDP a "3" handle for the quarter. Growth of 3.0% is close to the economy's growth potential, and with unemployment at just 4.5%, the Fed has no basis to cut interest rates at present.

The details of the retail sales report have a few interesting features. Sales of electronics were very strong, gaining 3.0% for the month following a whopping gain of 5.8% in November. In combination with a 1.2% gain in sales at health and personal care stores, the service sector appears to be well supported by the technology and health care sectors. These have been key sources of job growth.

Another interesting detail was the 2.3% gain in sales at eating and drinking places (restaurants). The increase likely reflects the decline in gasoline prices and the unseasonable weather, which made it easier and more pleasing to go out to eat.

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Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.

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