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April Retail Sales and Producer Prices

Economics in a nutshell: “Reports of the consumers’ demise appear to be premature.”

INDICATOR:  April Retail Sales and Producer Prices

KEY DATA:  Sales: +1.3%; Excluding Vehicles: +0.8%; Core: +0.9%/ PPI: +0.2%; Less Food and Energy: +0.3%

IN A NUTSHELL:   "Reports of the consumers' demise appear to be premature."

WHAT IT MEANS:  It's been an ugly year for a lot of retailers and that showed up in the first quarter earnings numbers. But some hope may have appeared in today's retail sales report. Households went out and hit the stores pretty heavily in April, even when you take out the rebound in motor vehicle sales. Almost every major category was up sharply. The only group that experienced a sales decline was building materials. However, those stores had been booming during the first quarter of the year and the year over year rise is still the highest of any of the categories except Internet sales. General merchandise demand was flat and restaurants saw a more modest increase, though that was good news given the declines they had suffered. So-called "core" retail sales, which exclude vehicles, gasoline, building supplies and food services were up sharply. The core closely follows the consumption number in the GDP, so they are looked at as an indicator of consumer demand.

On the inflation front, wholesale prices rose moderately as goods costs led the way. It's funny how rising energy prices changes the picture of inflation, isn't it? Not really. By the fall, we could be seeing year-over-year energy price gains rather than declines and while we are talking producer prices here, those quickly make their way into consumer prices. That is also true on the food side and the drop in wholesale food costs is good news for consumers. An interesting change is the deceleration in services inflation. Prices did rise, but modestly. Service inflation, which is nearly two-thirds of producer costs, has been decelerating this year. When you look at the details, and this report has about fifty different special indices, there are no categories where inflation is high.

MARKETS AND FED POLICY IMPLICATIONS: Has the consumer decided that it is time to spend again, or are was the April uptick just a bump in the mediocre growth trend?  I think it is real.  Incomes are growing solidly and household balance sheets are in good shape.  The job market is tight and people are quitting their jobs again, a sign of confidence.  Consumer confidence seems to be soft, though, and it is unclear exactly why that is the case.  My guess is that this is just one of those times where the data are strange and as we go through the rest of the spring and summer, we will see households actually spending their funds.  That is, April is likely the start of something good.  For the Fed, though, it's not the start but the follow through that matters.  One month is not enough for anyone to say happy days are here again for retailers.  However, producer inflation is no longer declining and while it is hardly a worry, the trend is up.  All-in-all, today's reports tell the Fed that conditions are not nearly as soft as the GDP data seemed to indicate and while they have time when it comes to inflation, they may not have as much time as they thought as well.