U.S. Economic Rebound More Tangible After Retail Data, Fed Gauge

Forecasts for a second-quarter rebound in the U.S. economy became more of a reality on Tuesday.

Consumers shrugged off rising gasoline prices last month, as U.S. retail sales rose in broad fashion amid a boost to paychecks from tax cuts, a Commerce Department report showed. The value of purchases at retailers climbed 0.3 percent, matching estimates, after an upwardly revised 0.8 percent gain in March, putting consumer demand in the April-June period on an improved trajectory.

A separate Federal Reserve index showed manufacturing in New York state expanded at a faster pace this month, while a private gauge of homebuilder sentiment advanced for the first time since December. The dollar and 10-year Treasury yields rose, while stocks declined, as the data fueled bets the central bank may raise interest rates three more times this year.

The retail figures indicate that smaller withholdings in the wake of Republican-sponsored tax cuts, combined with a thriving labor market, are allowing households to take higher gasoline prices in stride. The upshot: A rebound in second-quarter consumer spending is becoming clearer after the slowest gain in almost five years.

“Some of that energy price burden should be defrayed by the support to incomes from lower tax withholding,” Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., wrote in a note. “More importantly, every indicator suggests the bedrock support of growing labor income will continue to push consumer spending forward.”

Nine of 13 major retail categories showed advances in April, led by the biggest jump in sales at apparel stores since March of last year. Increased receipts were also evident at furniture merchants, building-materials outlets, non-store retailers and department stores.

So-called retail-control group sales, which are used to calculate gross domestic product and exclude food services, auto dealers, building materials and gasoline stations, improved 0.4 percent after an upwardly revised 0.5 percent gain.

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Filling-station receipts increased 0.8 percent, the most since January and reflecting a jump in gasoline costs that are now near the highest level since late 2014. That probably boosted retail sales, as Commerce Department figures aren’t adjusted for price changes.

Excluding automobiles and gasoline, retail sales also rose 0.3 percent, after an upwardly revised 0.4 percent gain in the previous month.

“Households are in good spirits and are spending in the new season,” James Knightley, chief international economist at ING Bank, wrote in a note. “Employment is rising, wages are growing and tax cuts means there is more cash in people’s pockets.”

What Our Economists SayApril retail sales were modestly disappointing, as the ex-auto results came in below consensus expectations. However, upward revisions to both March and February signal that consumers were on a firmer trajectory in the first quarter than previously indicated. The April results were poised to provide evidence that consumer spending was rebounding vigorously from a first-quarter soft patch, yet in light of the revisions to the prior two months, that weakness now looks less extreme. As a result, there is less need to see a dramatic pickup in spending in the current quarter.

– Carl Riccadonna, Bloomberg Economics

Read more for the full reaction note from Bloomberg Economics.

In the other reports Tuesday, the New York Fed’s Empire State manufacturing index rose in May to 20.1 from 15.8, indicating faster growth at factories in the northeastern state. A measure of expectations six months ahead rose almost 13 points to 31.1, after plummeting in April by the most since the Sept. 11, 2001, terror attacks.

The Housing Market Index from the National Association of Home Builders/Wells Fargo rose in May by two points to 70, rebounding from the lowest reading since October.

— With assistance by Chris Middleton, Katia Dmitrieva, and Jordan Yadoo

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