US Retail Rises in January
The US retail sales surged by 3% in January, marking the largest increase in two years. This is following two consecutive monthly declines in November and December. The rise in sales was led by purchases of automobiles and other goods, which reflects the country’s continued resilience despite higher borrowing costs.
Economists have raised their economic growth forecasts for the first quarter and declared that there is no imminent recession. Additionally, it is believed that the resiliency of the US consumer will likely add to the Federal Reserve’s desire to keep interest rates higher for longer to help rebalance demand and supply in the economy. The tight labour market, marked by the lowest unemployment rate in over 53 years, continues to generate strong wage growth, though the pace has slowed.
The Fed has raised its policy rate by 450 basis points since last March from near zero to a 4.50%-4.75% range, with the bulk of the increases between May and December. Two additional rate hikes of 25 basis points are expected in March and May. Financial markets are betting on another increase in June. However, fears that the US central bank could lift borrowing costs higher than currently thought are keeping expectations of a downturn in the second half of the year on the table.
The US economy grew at a rate of 2.9% in the fourth quarter. While manufacturing production has weakened, it appears that a recession in the sector would be mild. The boost in retail sales is also expected to fuel financial market speculation that the Federal Reserve could continue raising interest rates through the summer to cool domestic demand.
The increase in sales is likely supported by the biggest cost of living adjustment since 1981 for more than 65 million Social Security beneficiaries, which came into effect in January. Several states also raised their minimum wage. However, there were some concerns that the seasonal adjustment factors likely flattered retail sales in January and that there could be a reversal in retail sales in February.
Despite the technical distortions, Americans are still spending, which could further boost the US economy. The Bank of America Institute reported a surge in spending in January based on an analysis of Bank of America credit and debit card data. It said this suggested that while lower-income consumers are pressured, they still have solid cash buffers and borrowing capacity, noting that even for the lowest-income cohorts, this should provide support for some time yet. Citi card data also showed gains in services spending. The bottom line is that the underlying trend in consumption is not as weak as the December numbers indicated, but is also not as strong as the January numbers might suggest.