Retail spending rebounded in April

Washington, D.C. (CNN) US retail spending rose in April after two months of decline, showing that the US consumer is still fueling the economy.

The Commerce Department reported Tuesday that retail sales, which are adjusted for seasonality and not for inflation, rose 0.4% in April from the previous month. This is a weaker gain than the 0.8% increase economists had expected, according to Refinitiv.

The increase in April was driven by spending at car dealerships, restaurants, online and in “variety” stores such as florists and pet supply stores. Americans limit their spending on sporting goods, furniture, electronics, and at gas stations that month.

Retail sales fell by a downwardly adjusted 0.7% in March, in part due to lower gas prices and lower spending on durable goods.

Compared to the same month a year ago, retail spending grew 1.6% in April, the weakest year-over-year increase since the early months of the pandemic.

“The April retail sales figures point to the resilience of the economy,” said Natalie Cutlyar, national practice lead for retail and consumer products at BDO. “Consumers also prioritize travel and experiences, such as dining out.”

A strong job market continues to fuel spending

The US job market remains strong, which has led to increased spending. Employers added 253,000 jobs in April, a solid gain by historical standards, and average hourly earnings in April grew 16 cents, or 0.5%, to $33.36. The unemployment rate fell to a 53-year low that month.

“Ultimately, the labor market is what determines consumer spending because the number of jobs created plus wage gains determines personal income growth and that in turn drives consumer spending,” said Kathy Bostancic, chief economist at Nationwide Mutual.

Bostancic, like many other economists, expects the US economy to slide into recession later in the year as the labor market weakens and consumers curb their spending. She said she expects the unemployment rate to rise steadily to 5.5% in mid-2024.

The economic slowdown will be driven in part by tighter credit conditions, which intensified after the failures of Silicon Valley Bank and Signature Bank in March, according to a recent survey of chief loan officers measuring lending activity in the first quarter. Economists said that borrowing will be more difficult in the coming months.

Tighter lending standards mean consumers can’t spend as much and companies will have more difficulty expanding operations or taking on new projects, a typical development before an economic downturn, according to Michael Reynolds, vice president of investment strategy at Glenmede.

“That’s the evidence of a recession and we think we’re in the early stages of that,” Reynolds said. “If a company singles out a factor, that factor cuts its spending, and it’s income for another company that eventually will have to lay off some workers as well, then you can see that compounding and compounding only.”

One key measure of business investment, new orders for non-defense capital goods excluding aircraft, fell in four of the past five months through March. In the first quarter, companies also slashed their spending on equipment, according to the Commerce Department’s latest GDP report.

“Nonprofits reported that increased uncertainty in the banking sector limited their access to credit and delayed affordable housing and community support projects,” said the Fed’s latest Beige Book report.

Demand erosion is the goal of the Federal Reserve, which is trying to slow the economy to curb soaring inflation. Federal Reserve officials voted earlier this month to raise the central bank’s benchmark lending rate by a quarter point, to 5-5.25%.

The consumer price index rose 4.9% for the 12 months ending in April, according to the Bureau of Labor Statistics, a slightly slower pace than the 5% year-over-year rise in March. Fed officials expect inflation to cool further for the rest of the year as US consumers cut their spending, likely on goods first, according to economists.

Consumer spending on goods was strong in the first quarter, but an April survey by the Institute for Supply Management showed that new demand for manufactured goods remained in contraction territory for the eighth consecutive month. Spending on personal services and experiences has been strong in recent months and is expected to continue through the summer.

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