Weak start to US spending this quarter may delay Fed liftoff

[WASHINGTON] American shoppers' reluctance to open their wallets has economists stumped.

Retail sales barely budged in April, confounding projections for a small increase, figures from the Commerce Department showed Wednesday. That followed a 0.2 per cent drop from January through March that marked the first quarterly decline in almost three years.

Even with all the stars aligned, consumers have socked away the extra cash from lower gasoline prices and rising employment instead of spending the windfall. That casts doubts on how soon Federal Reserve policy makers, who need to be convinced growth is gaining momentum after a first-quarter slump, will be able to raise interest rates.

"The economy needs to pick up steam for the Fed to be really satisfied that we're leaving the weakness of the first quarter behind us," said Guy Berger, an economist at RBS Securities Inc. in Stamford, Connecticut, who projected sales would be unchanged and is the top-ranked forecaster for retail purchases over the past two years, according to data compiled by Bloomberg. "This puts a lot of pressure on the next month's number to be very strong to make up for the weakness in April."

Stocks fluctuated after paring earlier gains amid corporate deals and the weaker-than-forecast retail sales data. The Standard & Poor's 500 Index rose 0.2 per cent to 2,103.16 at 1:15 pm in New York.

Futures in the Fed's benchmark interest rate imply a 0.32 per cent rate at the end of 2015, down from 0.33 per cent on Tuesday. Most economists in a Bloomberg survey late last month predicted the central bank will start tightening in September, and the median forecast of Fed officials at the March FOMC meeting projected the rate would end the year in a range between 0.50 per cent and 0.75 per cent.

"The sluggish spending and economic growth performance will continue to argue for a later start to liftoff, essentially ruling out a mid-year hike," Millan Mulraine, deputy head of US research & strategy at TD Securities USA in New York, wrote in a research note. "And if growth momentum does not rebound more meaningfully in the coming months, even the September meeting might be too soon for the Fed to gain the necessary confidence in the sustainability of the recovery to justify policy tightening."

For now, TD Securities continues to project the first increase will occur in September, "but with numbers like these, the odds are falling fast," Mr Mulraine wrote.

The median forecast of 88 economists surveyed by Bloomberg projected April retail sales would rise 0.2 per cent. Estimates ranged from a decline of 0.5 per cent to an advance of 1 per cent.

Revisions to most categories for March were a saving grace for the otherwise disappointing figures for last month. Sales climbed 1.1 per cent in March, the biggest gain in a year. It was previously reported as an increase of 0.9 per cent.

Seven of 13 major categories showed increases in April, led by restaurants and bars and online merchants, the report showed. A tiny advance among miscellaneous stores tipped the balance in favor of gainers.

The dour tone of the report was reinforced by declines among discretionary items such as automobiles, furniture and electronics. Receipts at electronics stores have declined for seven consecutive months, taking them to the lowest level since January 2014.

Demand at grocery stores, service stations and general merchandise retailers also declined. The latter category includes department stores, which saw the biggest drop in purchases in more than a year.

The figures used to calculate gross domestic product, the so-called control group that excludes categories such as food services, auto dealers, home-improvement stores and service stations, were little changed after a 0.5 per cent increase in the previous month that was larger than previously estimated.

Unusually harsh winter weather was blamed for some of the slowdown in retail sales in the early part of 2015, when delays related to a West Coast port dispute also held back other economic activity. The economy barely grew in the first quarter, with GDP advancing at a 0.2 per cent annualised rate.

Household consumption expanded 1.9 per cent in January through March after growing at a 4.4 per cent pace in the prior three months, according to Commerce Department data issued last month.

Economists may mark down estimates for this quarter after the retail sales figures. Consumer spending was projected to accelerate 3.5 per cent in the April through June period, according to the median forecast of economists surveyed by Bloomberg in April.

"It definitely does not point to as much of a strong acceleration in Q2 for consumer spending as we were hoping to see," said Brittany Baumann, a New York-based economist at Credit Agricole CIB.

An improving job market is among reasons some economists remain optimistic toward spending. Payrolls bounced back in April with a 223,000 increase following a 85,000 gain the prior month, and the jobless rate fell to 5.4 per cent, the lowest since May 2008, according to Labor Department data.

Wage gains remain steady, albeit at relatively low levels. Hourly pay was up 2.2 per cent in April from a year earlier, holding within the narrow range tracked over the past four years.

"Given the strengthening labour market and rising wages, that should help the consumer going forward this year," said Ms Baumann. "We could see a pop-back in those May retail sales numbers."

Fed policy makers also need to be convinced that inflation is likely to return to their 2 per cent goal before raising rates. Other figures Wednesday also cast doubt on pricing power.

The cost of foreign-made goods unexpectedly dropped 0.3 per cent in April as the relatively strong dollar held down expenses for such things as food and automobiles, according to data from the Labor Department. The decrease in the import-price index compared with a 0.3 per cent gain median forecast of economists surveyed by Bloomberg.

Non-fuel imports were 2.3 per cent cheaper over the past 12 months, the biggest year-to-year decline since October 2009, in the early months of the economic recovery. The costs of foreign vehicles fell 1.9 per cent over that period, the biggest drop since data began in 1981.

BLOOMBERG