Yesterday’s retail sales report should dispel any lingering concerns that American consumers remain huddled in their basements, clutching a bar of gold with one hand and a loaded shotgun with the other. Indeed, even a relative pessimist like me has to admit that recent trends (log differences) look pretty good:
Yes, even on the current trend, it will be a long time to hit the old trend. And it is clear that the consumer has suffered – the gap between the old trend and the actual level of retail sales less gas is now just about a trillion dollars of foregone spending. Something of a disaster, at least for retailers (but helping deleverage the household balance sheet). The data appears to have left Federal Reserve Chairman Ben Bernanke’s outlook intact:
On balance, the incoming data suggest that growth in private final demand will be sufficient to promote a moderate economic recovery in coming quarters.
The Beige Book appears to be catching the retail trend, yet provides a tepid assessment of the general economy:
Overall economic activity increased somewhat since the last report across all Federal Reserve Districts except St. Louis, which reported “softened” economic conditions.
Which begs the question: Is the Fed too pessimistic (not to call the kettle black)? To be sure, even four percent growth is not enough to quickly pull unemployment rates lower. And, for the moment, the Fed appears to be content to let lingering doubts about the second half of the year to keep any emerging optimism in check. Not to mention a sustained disinflationary trend. From Bernanke:
On the inflation front, recent data continue to show a subdued rate of increase in consumer prices. For the three months ended in February, prices for personal consumption expenditures rose at an annual rate of 1-1/4 percent despite a further steep run-up in energy prices; core inflation, which excludes prices of food and energy, slowed to an annual rate of 1/2 percent. The moderation in inflation has been broadly based, affecting most categories of goods and services with the principal exception of some globally traded commodities and materials, including crude oil. Long-run inflation expectations appear stable; for example, expected inflation over the next 5 to 10 years, as measured by the Thomson Reuters/University of Michigan Surveys of Consumers was 2-3/4 percent in March, which is at the lower end of the narrow range that has prevailed for the past few years.
As the Wall Street Journal notes, this doesn’t sound like a guy eager to hike rates anytime soon. The Beige Book concurs with the inflation assessment.
Retail prices generally remained level, but some input prices increased. Where producers faced cost pressures on inputs, they were largely unable to pass those prices downstream to selling prices, although in Kansas City some manufacturers were considering raising selling prices due to higher raw materials costs.
But if we have learned one thing about Bernanke over the past three years, it is that he is not married to any particular forecast. If conditions change, he will as well. And, arguably, at this juncture, the risks to the forecast are feeling a little bit on the upside. Just a bit (it is OK to admit it). If this trend persists for much longer, it has got to work into Fedspeak sooner than later.
Bottom Line: The retail sales report was strong, pointing to both pent-up demand and sustainability. Yet the Fed remains on hold, realizing that a long, sustained period of high growth is necessary to soak up the un- and underemployed and relieved disinflationary pressures. Moreover, financial markets remains hobbled, leaving small firms in particular starved for credit. Still, FOMC members eye the balance sheet warily; makes any respectable central banker nervous. Faster than expected growth only makes them more nervous.
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