The most important piece of economic data last week surprised the markets. The U.S. retail sales for the month of January increased by 6% over the prior year – the largest since June 2005.
Retail shopping is on the increase in the US
Retail sales reveal the shape of an economy. Consumer spending is vital for economic growth and has effects on inflation as well. Therefore, the positive comeback in January is a strong signal that the U.S. economic recovery is on track and may grow at a faster rate than many expect.
Another takeaway from the surge in retail sales is if you give American consumers free money, they will spend it. One of the counterarguments of helicopter money (i.e., direct checks sent to Americans to support the economy during the recession) was that the consumer would not spend it but stash it and save it for better days – but the January data dismisses this theory completely.
Is the U.S. Economy at Risk of Overheating?
Policymakers have a tough job finding the right pace of economic growth. Not only do recessions pose challenges, but also economic expansions. When an economy grows too fast, it is at risk of overheating, and all efforts are made to avoid a so-called ‘soft-landing’.
Some may question why this is important during a health crisis when the world’s economies are still in recession? The answer is that the measures taken during the recession will have repercussions in the years ahead. For example, money printing and fiscal expansion will generate higher inflation in the years to come. It may not be evident right now, but the seeds have been planted, and so it is just a matter of time until it happens.
The same is valid for economic growth. Naturally, instead of economic recessions, an economy that grows faster is desired. The key is how to find the right balance between fiscal and monetary expansion, but how much is too much?
Those in the markets for some time now still remember the taper tantrum in the aftermath of the 2008-2009 Great Financial Crisis. When the Fed only hinted that it would unwind the balance sheet expansion, the markets corrected severely.
Are strong retail sales the first sign that economic stimulus is no more needed?