US January Retail Sales Rise Less than Expected

Location: Toronto
Author: RBC Financial Group Economics Department
Date: Wednesday, February 16, 2011

Retail spending in January 2011 rose only 0.3% relative to expectations of a 0.5% increase. As well, the gain in December 2010 was revised down slightly to 0.5% from an initially reported gain of 0.6%. It was a similar story on an ex-auto basis for which sales rose 0.3% but was below expectations for a 0.5% gain. The gain in ex-auto sales in December was also revised down to 0.3% from the 0.5% previously estimated.

The report confirmed that auto sales rose a modest 0.5%, which was in line with earlier reported unit auto sales. This increase represented a slowing from a 1.5% gain in December (previously reported as 1.1%). Most of the downward surprise in the January report was in the gasoline and building materials component. The former rose a strong 1.4%, yet we had expected rising gasoline prices to send this component up an even greater 4% in the month. Excluding sales at auto dealerships and service stations, sales rose a still modest 0.2% following a 0.1% gain in January. The modest January gain in this measure reflected an unexpected 2.9% plummet in building materials following a 1.8% rise in December. Adverse weather in the month might have been a factor weighing on sales for this component.

The retail sales measure that goes into the consumer spending component of GDP excludes auto, gasoline and building material sales. This measurement managed to rise a solid 0.4% although the December increase was revised down to -0.1% from a previously estimated 0.3%. The downward revision to December sales will likely result in fourth-quarter 2010 annualized consumer spending growth being lowered by 0.2 percentage points to 4.2%. The bounce back in January, however, augurs well for growth in this key expenditure area to remain solid by rising an expected 3.2%.

The projected gain in first-quarter 2011 consumer spending assumes strengthening job gains during the quarter thus recovering from January’s disappointing, and likely weather-related, gain of only 36,000. Continued strength in spending is also a reflection of the payroll tax cuts introduced at the start of the year, thereby lending households additional disposable income. Monetary policy will also play a role, with the system remaining very liquid and interest rates lows. This highly accommodative stance by the Fed is unlikely to be altered in the near term, as the central bank tries to sustain the recent strengthening in growth so as to put greater downward pressure on the unemployment rate. Our forecast assumes both the completion of QE2 by mid-2011 and the maintenance of the current 0% to 0.25% range for Fed funds for this year and into 2011.

Information contained in this report has been prepared by the Economics Department of RBC Financial Group based on information obtained from sources considered to be reliable. While every effort has been made to ensure accuracy and completeness, RBC Financial Group makes no such representation or warranty, express or implied. This report is for information purposes only and does not constitute an offer to sell or a solicitation to buy securities.

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