Global Daily – The US consumer comeback

by: Maritza Cabezas , Arjen van Dijkhuizen

  • Strong May retail sales signal rebound of consumer spending…
  • …adding to the case for Fed rate increases later this year
  • China’s May data provide some signs of economic stabilisation

The comeback of US consumers

After a weak start this year, US retail sales rebounded in May. Nominal retail sales increased 1.2% from an upwardly revised 0.2% in April. May was the strongest month for auto sales in a decade. Vehicle sales grew 2% and contributed 0.43% to the change in retail sales. Higher gasoline prices increased 3.7% and boosted the headline figure, contributing 0.31%. Core retail sales (excluding gasoline, autos, building materials and food services) which correspond to the consumer spending component of GDP, grew by 0.7% up from 0.1% the previous month. Solid retail sales, follow a strong labour market report, suggesting that economy is on firmer footing.

US households in better shape

Indeed, household fundamentals have improved and leave them in a better position to spend. The ratio of household liquid assets to liabilities, as well as household purchasing power and the rate at which they are saving, indicate that they are in excellent shape. In addition, the ratio of household debt to disposable income is down roughly 25 percentage points from its peak (98%). If we are right, households should also receive a boost from an acceleration in wages in coming months, while job growth should remain robust. We expect consumers to provide a tailwind for underlying economic activity going forward.

Fed set for rate hike

Chair Yellen in her most recent intervention said that if the labour market strengthening is confirmed and inflation readings continue to improve, lift-off would likely come before the end of the year. Other data released on Thursday, showed that import prices rose in May by 1.3% from -0.2% the previous month. This marked the first increase since June 2014 and the sharpest rise in more than three years.  Although this is partly a result of higher oil prices, we expect core inflation to continue to pick up at a modest pace. Next week’s FOMC meeting will shed more light on where the FOMC members stand. We think that these reports will give more confidence to Fed policymakers that the economy is on the right track, setting the scene for a rate hike in September.

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China’s May data provide signs of stabilisation …

After weak April data indicated that China’s economy started Q2 on a weak note, May data show signs the economy is stabilising, benefiting from previous easing measures. Still, the latest data present a rather mixed bag. PMIs, housing sales, industrial production and retail sales show a picture of stabilisation or even improvement, while trade data, headline inflation and fixed investment point to ongoing weakness.

… although presenting a rather mixed bag

The high frequency activity data published on Thursday generally showed a somewhat firmer trend than in April. Industrial production growth rose further in May to 6.1% yoy (April: 5.9%), which was slightly better than expected. Retail sales rose marginally to 10.1% yoy (April: 10%). By contrast, fixed investment continued its downward trend, reaching a low of 11.4% yoy in May (April: 12%). Bloomberg’s monthly GDP estimate rose to 6.55% yoy in May (April: 6.4%).

Stimulus will keep growth on track for 7% target

We expect some improvement in growth momentum in the second half, as the authorities remain committed to add measured monetary and fiscal stimulus, while we also see a strengthening of external demand from advanced economies. We have left our growth forecast for 2015 unchanged at 7%, in line with the official target.