Strong US retail sales lift rate rise expectations

Posted on November 15, 2016

A bigger than expected jump in US retail sales last month renewed optimism about the strength of consumer spending, supporting the argument for the Federal Reserve to lift interest rates in December.

Headline retail sales rose by 0.8 per cent last month, above economists’ expectations for a 0.6 per cent rise, the Commerce Department said on Tuesday. That followed upwardly revised growth of 1 per cent in September and marked the strongest back-to-back increase since 2014.

The data were further evidence of a solid US economy, prompting some analysts to question the need for an economic stimulus package promised by president-elect Donald Trump.

On the back of strong consumer spending, a healthy labour market and improving economic growth, the Federal Reserve is widely expected to lift rates when it meets next month. Federal fund futures point to a 94 per cent chance of a December move.

“Overall, this report exceeded expectations on all fronts and will present the data-dependent Fed with additional evidence to go forward with a hike in December,” Robert Both, strategist at TD Securities, said.

Moreover, following the report, economists at Barclays lifted their estimates on fourth-quarter GDP by two-tenths to 2.7 per cent, citing higher personal consumption growth than they had previously estimated.

That higher growth would raise questions about a shift to expansionary fiscal policy under Mr Trump that markets are betting will drive economic growth and stoke inflation.

“It really questions the need for a massive fiscal stimulus at this point,” Dr Harm Bandholz, economist at UniCredit Research said. “After all, the idea of such a stimulus is to temporarily support the economy during downturns.”

That, he argued, was because research showed that the impact of government spending on income was much smaller when the economy was close to full employment — as the US is at present.

“Moreover, as highlighted already by Milton Friedman, poorly timed policies add instability to the economy, potentially exacerbating rather than damping business cycles,” Dr Bandholz added. “They initially may cause overheating and higher inflation, and then a deeper recession.”

Retail sales were lifted by purchases of cars and light trucks and a 1.1 per cent rise in building materials, which might partly be attributed to clean up efforts after Hurricane Matthew. However, the details of the report showed the gains were broad-based. Sales at clothing and accessories stores rose 0.6 per cent; while those at sporting goods and hobby stores increased by 1.3 per cent. Receipts rose 1.5 per cent at online stores and 2.2 per cent at gasoline stations.

So-called control retail sales — which strip out more volatile items such as autos, petrol and building materials and are used to calculate GDP — climbed by 0.8 per cent in October, compared with 0.3 per cent growth the previous month. That eclipsed analysts estimates for 0.4 per cent growth.

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