U.S. Retail Sales Unexpectedly Inched Higher in April

• Retail spending inched up 0.1% in April 2013, which was stronger than market expectations for a 0.3% decline, following a revised 0.5% (was 0.4%) drop in March.
• Overall sales were constrained by a price-led 4.7% drop in nominal sales at gasoline stations. Auto sales unexpectedly rose 1.0%.
• The so called “control” retail sales, which exclude sales of gasoline, motor vehicles, and building materials and enter directly into the Bureau of Economic Analysis’ (BEA) consumer spending estimate, rose 0.5% and was above market expectations for a 0.3% gain, following upwardly revised 0.1% (was -0.2%) and 0.5% (was 0.3%) increases in March and February, respectively.
• The modest gain in retail sales in April occurred despite a sharp drop in gasoline station sales that had more to do with lower prices than fundamental weakness in consumer demand. The rebound in core sales, along with upward revisions to prior months, actually points to some modest upside risk to our forecast that consumer spending rose at a 2.0% rate in the second quarter of 2013 although the increase is still likely to be below the 3.2% surge in the first quarter. Even with some moderation in spending, it remains the case that consumers have to this point weathered higher payroll taxes implemented in January and uncertainty about the effect of government sequestration cuts implemented in March surprisingly well.

Retail sales inched up 0.1% in April 2013, which was stronger than market expectations for a 0.3% decline, following a downwardly revised 0.5% decline (was -0.4%) in March and an upwardly revised 1.1% (was 1.0%) increase in February. The overall increase in the month was constrained by an outsized 4.7% plunge in sales at gasoline stations resulting from a sharp drop in gasoline prices. Auto sales unexpectedly rose 1.0%, which was at odds with an earlier reported 2.2% drop in unit vehicle sales in the month. Building material sales jumped 1.5% to more than retrace a 1.0% drop in March. The pick up in sales at building material sales in part likely reflects a return to seasonal weather in April after a cooler than normal March delayed spring yard work, although improving housing markets likely played a role.

The so called “control” sales (excluding the motor vehicle, gasoline, and building materials components), which is the component of the report that enters directly into the BEA’s monthly and quarterly consumer spending estimates, jumped 0.5%, which was stronger than the 0.3% gain expected, following upwardly revised 0.1% (was -0.2%) and 0.5% (was 0.3%) increases in March and February, respectively. This left the level of control sales in April already an annualized 2.5% above its first-quarter 2013 average.

The modest gain in retail sales in April occurred despite a sharp drop in gasoline station sales that had more to do with lower prices than fundamental weakness in consumer demand. The rebound in core sales, along with upward revisions to prior months, points to some modest upside risk to our forecast that consumer spending rose at a 2.0% rate in the second quarter of 2013 although the increase is still likely to be below the 3.2% surge in the first quarter that marked the largest quarterly increase in more than two years. Even with some moderation in spending, it remains the case that consumers have to this point weathered higher payroll taxes implemented in January and uncertainty about the effect of government sequestration cuts implemented in March surprisingly well. Our forecast assumes that fiscal contraction will contribute to a near-term slowing in overall GDP growth to slightly below a 2% rate in the second quarter of 2013; however, signs that fiscal cuts have not yet been enough to derail private demand is in line with our expectation that stronger growth in the second half of the year will follow once the near-term fiscal drag has run its course.

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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