April's slightly weaker-than-expected retail sales and sluggish core consumer inflation dampened expectations for a big economic rebound, but won't deter the Fed from raising rates.
The data do show the first quarter's tepid 0.7 percent growth was transitory but, on the other hand, does not support an outsized jump in second-quarter growth.
April retail sales were slightly softer than expected, at 0.4 percent versus a projection for 0.6 percent, and consumer inflation, at the core, was 0.1 percent, barely a pickup after a decline in March. Headline CPI, including gasoline and food, was up 0.2 percent, as expected.
Both numbers were projected to rebound from March's softness, which had been blamed in part on the fact that Easter arrived late this year, in mid-April.
A positive was that March retail sales were revised to a gain of 0.1 percent from a decline. But the control retail sales, without autos, gasoline or building materials, were up just 0.2 percent, half the gain expected. That number influences GDP forecasts.
"The components of the retail sales report, together with the inflation data used to deflate nominal values for personal consumption, boosted our Q1 GDP tracking by one-tenth to 0.8 percent," wrote Barclays economists. But they are leaving their tracking forecast for the second quarter at 2.5 percent, which is slightly below an average 3 percent.
"The underlying fundamentals of the consumer still look pretty healthy with the employment growth and the savings rates. The consumer spending is a disappointing start to the first quarter," said Kevin Cummins, senior economist at NatWest Markets.
The retail sales data follow a robust April jobs report, which saw unemployment drop to 4.4 percent. Consumer sentiment for May was a positive surprise, rising to 97.7, above expectations for 97.
Stocks futures weakened on the reports, and Treasury yields, which move inversely to prices, fell.
The retail report was not as worrisome to markets as the consumer price index. "The thing that's really disappointing is after a bad number in March we only got a return to trend instead of a compensatory increase," said Tom Simons, money market economist at Jefferies. The CPI also was expected by many to beat Wall Street forecasts, since it followed a much hotter-than-expected PPI, or wholesale level inflation and higher import prices.
Earlier this week, the average tracking forecast for second-quarter GDP in the CNBC/Moody's Analytics Rapid Update was 3.4 percent.
"Truth be told it was all weakness in auto sales. Consumers stopped visiting car lots in the first quarter because other retail sales were quite respectable," noted Chris Rupkey, chief financial economist at MUFG Union Bank. Rupkey noted that the prices for used cars and trucks fell another half percent in April and are down 4.6 percent from last year's level.
Medical care commodities also dropped 0.8 percent in April, which he said could be due to uncertainty about the repeal of Obamacare.
Simons said the Federal Reserve will look past the data., particularly when it comes to inflation. "The recent FOMC statement suggests the Fed is not going to be deterred by modest weakness in data. At this point, they kind of point out that it's going to be around the target, and it could be below," he said.
Rupkey said Fed officials could be disappointed that the inflation level remains below their 2 percent target. "PCE inflation isn't due out until later this month on May 30, and it tends [to] be almost a half-percentage point under the inflation rate measured by the CPI survey of prices. Core PCE inflation was 1.6 percent year to year in March and core CPI inflation was 2.0 percent year-on-year," he said.
PCE, or personal consumption expenditures inflation data, is the metric favored by the Fed.
Cummins said one important element in the CPI shows a potential for a longer-term slowdown.
"The owners' equivalent rent component had been rising at 0.3, and it has only averaged 0.2 in the last two months. Shelter is about 40 percent of index and that component is pretty soft ... it's just two months, but it does appear that something like rents which are pretty sticky are perhaps going to only increase 0.2 on the month going forward."