US Economic Update

US Retail Sales Disappoint

The advanced report on retail sales showed a feeble 0.1% gain in February, disappointing forecasts for a 0.3% increase. The weakness was fairly widespread with falling sales for electronics, furniture and clothing. Higher gasoline prices boosted sales at service stations, while sales of motor vehicles and parts were also firmer. Excluding autos, sales dipped 0.1%. January-February, sales averaged a 2.7% increase compared to the same period a year ago, a sharp slowing from the average 4.9% increase in the final three months of 2006.

Sales were 3.2% higher than in February 2006, a modest rally from January’s paltry 2.2% rate, which was the slowest in just about four years.  Excluding autos, sales were 3.1% higher than a year ago, marking a low since 2003.

The increase in February was narrowly based with motor vehicles/parts sales rising 0.9%, gasoline service stations posting a 1.2% gain and food and beverage stores showing a 0.6% increase. The biggest losses were recorded at general merchandise stores, building and garden centres and at a providers of food and drink services. Clothing stores experienced a sharp 1.8% drop, which may have been influenced by the colder weather.

Overall, recent retail reports are tracking our view that economic activity is slowing in early 2007 after the robust pace late last year as the effects of past interest rate increases and deteriorating real estate wealth take effect.

However, overall conditions for the consumer remain supportive as net worth continued to grow in late 2006, the economy is still generating job gains, albeit at a slower pace than in 2006, and wage growth is solid.

Financial market volatility and the wobbly real estate market could continue to keep activity on the light side in March, but positive fundamentals make a significant retrenchment unlikely in our view. There is not enough in this report to turn the Fed away from its steady policy stance at next week’s rate-setting meeting, especially given that this Friday’s CPI report is likely to show that the core inflation rate edged higher in February.

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