Retail Sales Signals Economic Growth and More Federal Reserve Tapering

retail sales

US retail sales jumped more than expected in February, suggesting the consumer spending freeze brought on by frigid weather the two months prior may be melting. It signals that economic growth is underway and that the Federal Reserve can continue tapering its stimulus program, some financial experts say.

“You are seeing more confidence in the economy from the man on the street to corporate CEOs looking to expand,” said Ethan Anderson, senior portfolio manager at Rehmann. The financial services firm has about $1.5 billion in assets under management in Grand Rapids, Mich. “That’s what the Federal Reserve is trying to install in the economy. Things are definitely moving in the right direction.”

Retail sales increased 0.3% in February month-over-month, the Commerce Department reported. Economists on average expected a 0.2% uptick given the snowstorms across the country. It marked a significant improvement over January, which experienced a 0.6% drop.

“Although February sales data beat forecasts, it is important to note that the surprise gains came from a lower base after January data was revised downward,” Andrew Barber, founder of Asymmetric Risk Advisors with $100 million in assets under management in Corning, N.Y., said in an email.

Consumer spending is more tied to the nominal growth in wages and salaries more so than weather, says Steve Blitz, chief economist at ITG Investment Research. Wages and salary growth has been slowing since early 2011 when it was improving at a clip of 5.5% year over year. Stronger retail sales growth is expected in the next month or two as consumer spending catches up to growth in wages and employment, says Blitz.

“Once caught, however, unless there is a similar surge in wages the upbeat retail sales data will settle back to reflect 4% nominal growth in wages,” Blitz wrote in a client note Thursday. “(That is) good enough for 2% real consumption growth, about where it has been, but not good enough to generate the acceleration in real growth the Fed (Federal Reserve) and the White House are anticipating.”

Some economists say the retail sales report is not statistically significant and that there is no economic growth. That signals the Federal Reserve may not be able to undergo more tapering.

John Williams, founder and publisher of Shadow Government Statistics, says the retail sales day actually show erosion in consumer spending after factoring in inflation. It suggests there is a higher likelihood that the economy is contracting in the first quarter. The February retail sales showed a 0.27% uptick after the January number was revised lower to 0.41%, which means there was actually a 0.64% month-to-month drop. The January and February numbers shows retail sales have shrunk at an annualized quarterly rate of 2.5%. When adjusted for inflation, the quarterly drop is closer to 3.8%, Williams wrote in a report Thursday.

Most retail chains reported difficulty in growing revenues in their fourth quarter of 2013 because of changes in consumer behavior aside from the weather, according to Credit Suisse.

“While the weather took most of the blame for poor sales at the end of the quarter, retailers found it tough to reverse the drop off in foot traffic, as it appears consumer spending increasingly shifted online and the sustained promotional intensity yielded diminishing or little returns in store,” Michael Exstein, an analyst at Credit Suisse wrote in a report March 10. “As Nordstrom (NYSE: JWN) President Blake Nordstrom noted, the structural change in shopping behavior accelerated much faster than many retailers anticipated.”

Consumer spending accounts for more than two-thirds of the economy. The Federal Reserve will take it into consideration at its policy meeting set for next week. Board members will debate whether they can continue tapering monthly bond buying program, known as quantitative easing or QE, currently at $65 billion a month.

The retail sales and other economic data signal that growth is strong enough that the Federal Reserve can continue tapering its monthly bond purchasing program more, says Barber of Asymmetric Risk Advisors. “We anticipate a further asset purchase reduction of $10 billion to be announced next week,” he wrote in an email.

By Trang Ho



The Wall Street Journal

Ethan Anderson, senior portfolio manager at Rehmann (interview)

Andrew Barber, founder of Asymmetric Risk Advisors (email)

Shadow Government Statistics (report)

ITG Investment Research (report)

Credit Suisse (report)



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