US Consumers Power Ahead, Despite Headwinds
The U.S. consumer is powering ahead at what could be the best levels since the financial crisis, despite economic headwinds and uncertainty in Washington.
The February increase in retail sales of 1.1 percent was nearly double what many economists expected, and now they see economic growth at a better-than-expected pace in the first quarter. Retail sales rose the most in five months even with higher taxes and rising gasoline prices.
Mesirow Financial economist Diane Swonk says a lot of the credit for a more confident consumer goes to the improvement in housing and rising home prices.
"It really is important to understand the interactive role that jobs and wealth create together. The jobs picture has improved, and while it is not perfect, it's important," she said. The retail sales number follows a stronger-than-expected February jobs report, which showed that 236,000 non-farm payrolls were created.
"That is one of the pivotal points, and it's been a real game changer. The biggest pain we face is self-inflicted, and that is a major shift from where we've been in the recovery," she said.
She now expects first quarter GDP growth of about 2.5 percent, from 2.1 percent, but she sees the "sequester," or the automatic spending cuts to the federal budget, shaving a few tenths of a percent off of second quarter growth, estimated now at 1.6 percent. Swonk sees growth rising to 3.2 percent by the fourth quarter.
Consumers have held up better than expected, even with budget wrangling continuing in Washington. The 2 percent increase in payroll taxes and the delay in federal income tax returns to tax payers did not stall out spending, as many had expected.
"Three percent GDP. I don't have it on paper yet, but it's certainly a reasonable forecast," said Deutsche Bank chief U.S. economist Joe LaVorgna. His published first quarter GDP forecast is currently 1.5 percent."I am stunned at how resilient the consumer is ... we had high gas, slower (tax) refunds, horribly inclement weather, and the end of the payroll tax holiday — now these numbers are obviously susceptible to revision, and maybe March is weaker, but when you look at the data you have to remember one of the things that weighed on the data in fourth quarter was utility growth (because consumers lost power after Sandy)."
He added: "Consumer spending numbers look now that they're better than Q4." Fourth quarter GDP rose just 0.1 percent but that number is expected to be revised slightly higher.
"It's been amazing how much layoffs abated, and we know hiring has picked up...It's just a different mentality," Swonk said. "Maybe everybody's discounted it, or we've gotten used to dysfunction in Washington. The bottom line is there's just much more momentum to deal with these headwinds. We can make it through like we couldn't a few years ago."
Swonk also said the effects of Hurricane Sandy could be a factor in the retail sales number, and the rebuilding on the east coast could continue to show up in economic data as a positive. Core retail sales, excluding automobiles, gasoline and building materials, rose 0.4 percent, up from 0.3 percent in January.
High gasoline prices drove up receipts at gas stations by five percent, the biggest jump since August. Without gasoline, sales rose 0.6 percent. Auto dealership receipts increased 1.1 percent, after falling slightly in January.
But LaVorgna is also wary of being burned. "I feel like we've been here before," he said. "It looks too good to be true that we're getting decent growth despite the headwinds."