Strength of February Retail Sales Impressive, But Q1 Consumer Spending Could Show Only Tepid Gain
Retail sales increased 0.3% in February, after a downwardly revised 0.1% increase in January (previously reported as a 0.5% increase) and a 0.2% drop in December (prior estimate was 0.1% decline). Excluding gasoline and autos, retail sales advanced 0.9% in February reflecting gains in sales of furniture (+0.7%), apparel (+0.6%), electronics and appliances (+3.7%), sporting goods (+1.2%), and general merchandise (+1.0%). However, the January-February data of retail sales show a smaller increase in retail sales compared with the fourth quarter tally (see table below). Unless consumer outlays on services and March retail sales are significantly strong, the gain in consumer spending during the first quarter is most likely to be smaller than the fourth quarter's annualized increase of 1.7%.
In related news, the University of Michigan Consumer Sentiment Index edged down to 72.5 in the preliminary March survey after posting a decline in February also. The University of Michigan Consumer Sentiment Index has declined in four out of the last six months. The Current Economic Conditions Index (down 1.0 point to 80.8) and the Expectations Index (down 1.2 points to 67.2) both declined in March. The link between consumer spending and retail sales has become tenuous in recent years. Nevertheless, in a weak economic environment, the signals from consumer surveys provide clues of changing economic conditions that are useful to assess the status of the economy.
Rebound in Inventory Accumulation in Store for 2010?
Total business inventories held steady in January. Factory inventories increased 0.2% in January, while wholesale and retail inventories dropped 0.2% and 0.1%, respectively. Total business sales advanced 0.6% during January, after a 1.00% increase in the prior month. The inventory-sales ratio of the business sector was down one notch to 1.25 in January; the record low for this ratio is 1.24 set in 2005 (see chart 3). As the economy gathers momentum, inventories are projected to make a sizable contribution to real GDP, which could be in the first-half of 2010 or later in the year. The timing is unclear but it is nearly certain that an inventory accumulation led spike in real GDP is in store for 2010.
