US: Will consumption blossom in April? – Deutsche Bank

Analysts at Deutsche Bank explain that the portion of the retail sales that goes into GDP is known as retail control and this series excludes automobiles, gasoline stations and building materials.

Key Quotes

“Roughly speaking, retail control accounts for around 25% of personal consumption expenditures (PCE), meaning that most of what we learn about the state of the consumer comes from other data sources. However, given the reasonably high correlation between the quarterly sequential changes in retail sales and inflation-adjusted consumption, investors tend to use the former as a guidepost for forecasting PCE. For what it is worth, most of consumer spending is comprised of services, which are about 70% of total household expenditures.”

“Last quarter, nominal retail sales grew at a 3.7% annualized rate, which was down from 6.4% in Q4 2016 but still up slightly relative to Q3 2016 (3.6%). However, inflation-adjusted goods spending in the GDP accounts was up only 0.1% annualized last quarter. Retail sales excluding autos have fared better. This category was up 5.6% annualized in Q1, which followed increases of 1.8% and 5.3% in Q3 2016 and Q4 2016, respectively. There are several reasons why we anticipate faster growth this quarter for both headline and ex auto retail sales.”

“One, last quarter’s consumer outlays, at least for March, may have been distorted by the late Easter holiday. Since the holiday shifts between March and April from year to year, the Commerce Department has difficulty seasonally adjusting the data. Indeed, there have been times in the past when a late Easter pulled spending out of March and pushed it into April, which was likely the case this year, as well.”

“Two, various measures of consumer attitudes remain at historically-elevated levels. The April reading on the Conference Board's consumer confidence index was 120.3, down from a 17-year high in the previous month (124.9). The University of Michigan consumer sentiment index was essentially unchanged in April at 97.0—just shy of its post-recession high of 98.5 reached in January. Since consumer attitudes tend to be forward-looking, there is a high likelihood that spending will rebound.”

“Third, and arguably most importantly, household fundamentals are rock solid. According to our calculations, nominal household income growth—as proxied by withheld income tax receipts—has accelerated since March, expanding well in excess of 6%. At the same time, the personal saving rate remains elevated at 5.7% while household net worth to disposable income is near an all-time record high.”

“Combined, these three aforementioned factors should propel total inflation-adjusted consumption growth up to a 3.5% annualized pace this quarter, which compares to a meager 0.3% gain in Q1. This should be evident from today’s retail sales data. Remember, also, to be mindful of revisions to retail sales, as they can sometimes be substantial.”