Despite inflation, consumers may be stronger than investors expect

Published Thu, Apr 14 20222:02 PM EDTUpdated Thu, Apr 14 20224:38 PM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

March retail sales were slightly weaker than expected, but the consumer may actually be stronger than the number suggests. Retail sales rose 0.5%, slightly below the 0.6% expected by economists surveyed by Dow Jones. Retail sales gained 6.9% from a year ago, boosted in part by inflation. February sales were revised higher by a half-percentage point to show a 0.8% gain. The biggest gain in March came from gas stations, which were up 8.9% on the back of an 18.3% jump in fuel prices in the period. The sector is up 37% over the last year. "I think the consumer is stronger than this report revealed. Clearly, this report shows the impact of higher gas prices and higher food prices, and this is taking away from some kind of goods spending," said Michelle Meyer, U.S. chief economist for Mastercard. She said the retail sales report does not include the surge of spending that is going on in travel and for experiences, and that spending is in an upswing. Going out to spend Airline spending rose 44.8% year over year in March and lodging jumped 46.4%, according to Mastercard SpendingPulse data. Those items are not included in the government's retail sales data. The Mastercard data measures in-store and online retail sales across all forms of payment. Meyer said the data showed signs of an economy that is reopening, with consumers spending more in brick-and-mortar stores but less online. The U.S. Census Bureau reported that sales at general merchandise stores rose 5.4%, but online sales fell sharply, declining 6.4% for the month. Food and beverage store sales, along with bars and restaurants, rose 1%. "I think the longer the inflation shock lasts, the more problematic it will be for the consumer," Meyer said. "I think what we're seeing now from the consumer is they have the ability to buffer it for the time being." The Census Bureau's retail sales report was followed Thursday morning by a surprise improvement in the April University of Michigan consumer sentiment index . Sentiment rose to 65.7 from 59.4, the lowest level since September 2011. Consumers may be absorbing some of the price shock, since they see high inflation but not continually increasing inflation. In the sentiment report, one-year ahead inflation expectations were at 5.4%, the same as last month. "Today's retail sales report was negative incrementally for discretionary spending, but it doesn't leave me thinking the consumer is falling apart," said Jonathan Golub, chief U.S. equity strategist at Credit Suisse. Consumers are doing OK Golub said the consumer is being helped by two things: the strong improvement in household balance sheets since the pandemic and a very strong job market. "I think the consumer is in OK health. I think if you're looking at this from a stock market perspective, how is the consumer after they spend on gasoline? If you're an investor in the S & P 500, there's still a sale," Golub said. "After you spend on stuff you don't want to spend on, how much do you have left?" he added. "Does this say the consumer is going to be more squeezed on discretionary spending? Yes, but does this mean the consumer is not going to spend money?" Golub said the consumer discretionary sector is one of the four cyclical areas he favors, but he said it has been showing the greatest signs of weakness. His other cyclical choices are industrials, energy and materials. "I think we're just so quick to throw out those expenditures and say they don't count. They turn into profits. They're profits for oil companies, but if you looking at Target or Walmart or Macy's or whatever, will spending on gasoline in some way crimp their ability to spend in your store? Then of course the answer is yes," he said. The S & P consumer discretionary sector is represented in ETFs, including the Consumer Discretionary Select Sector SPDR Fund . This ETF is down more than 12.7% for 2022, but it's up 8.8% over the past month. The ETF's holdings include Tesla, McDonald's , AutoZone, Nike, Amazon, Target and Dollar General . Amazon and Target shares are off their 52-week highs, but the discounter Dollar General hit a fresh high of $250.30 on Thursday.

Shoppers walk in front of a Target store at the Lycoming Crossing shopping plaza in Muncy, Pennsylvania.

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March retail sales were slightly weaker than expected, but the consumer may actually be stronger than the number suggests.