Spending Data Afford a Peek Ahead

Second-quarter sales still look strong.
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Buy the Sky and Sell the Sky

JACKSON HOLE, Wyo. -- Two things today.

The producer price index for April played out pretty much as market participants expected.

Owing to a whopping 29.1% increase in gasoline prices, the overall index jumped 0.5% (compare that to an average monthly increase that rounds to nil over the past two years).

The core (excluding food and energy) index, meanwhile, rose 0.1% (precisely its average monthly increase over the past two years). This produced a second straight 1.7% year-on-year rate of increase; the core index exhibited neither deterioration nor improvement between March and April.

A peek ahead.

Note that if the core PPI for May prints a trend 0.1%, its year-on-year rate of increase will accelerate (deteriorate) to 1.9%. Keep in mind that the

Fed

wants to see the underlying (core) price measures improve in order to keep it from thinking seriously about raising rates.

The retail sales report for April, including the revisions to March data, printed weaker than the market (and especially your narrator and some good forecasters) expected.

Overall sales rose just 0.1% in April and the originally reported 0.2% March increase was revised down to show a 0.1% gain. Sales excluding autos, meanwhile, rose 0.4% in April and the originally reported 0.5% March increase was revised down to show a 0.4% gain.

These numbers send one clear message: The second-quarter retail sales performance will not come close to matching its first-quarter (and cycle-best) exhibition, but it is on track to exceed the showings we've seen during the three strong sales years ended 1998.

Overall sales are on track to rise 5.7% during the second quarter. Compare that to 14.5% during the first and an average 5.3% since 1996.

Sales excluding autos are on track to rise 7.4% during the second quarter. Compare that to 13.2% during the first and an average 5% since 1996.

Sales excluding building materials, gasoline and autos (this series is used to produce the personal consumption expenditure (or PCE) numbers that show up in the gross domestic product (or GDP) report) are on track to rise 6.6% during the second quarter. Compare that to 12.4% during the first and an average 5% since 1996.

A peek ahead.

Keep in mind (a) that the retail sales series captures less than half of the total spending that goes on in any given month because it does not include spending for services and (b) that spending for services accounts for roughly 59% of all personal consumption expenditure. As such, it is unwise to cite the anticipated deceleration in retail sales between the first quarter and the second to conclude that overall consumption will decelerate to the same degree.

In fact, if spending for services turns in even trend increases during each of the three months through June, there is currently no reason to expect that the second-quarter PCE number will not come within a point of matching the 6.7% increase it turned in during the first quarter, when it contributed 4.68 percentage points to the GDP growth rate.

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