Huge surprise on the economic front from the United States – the Retail Sales crushed expectations, surging more than 17% in May 2020, outpacing even the most optimistic forecast.
For once, the economic stimulus seems to have created the right response from the consumer, as spending has finally increased.
This is yet another V-shape recovery after the Empire State Manufacturing at the start of the trading week. Unsurprisingly, the non-store retail sales outpaced the traditional retailers, as the US economy was in lockdown mode for most of the month in question.
Implications of a V-Shape Recovery in the Retail Sales Numbers
Let us digest the numbers for a second. The MoM Retail Sales was expected to rise by 7.9% – instead, it rose 17.7%. In doing so, it established a new record when compared with the last major surprise in October 2009 (right in the midst of the Great Financial Crisis). Moreover, the April data was revised higher as well, from -16% to -14.7%.
A quick look inside the report reveals some major surprises. Non-store retailers saw the biggest jump YoY, followed by building materials – clothing, food, and drinks fell the most.
Investors pay particular attention to a so-called control group, that is used for GDP calculation purposes. It is often viewed by analysts as a more reliable indicator of the underlying consumer demand – it came in more than double the forecast. Furthermore, Retail Sales ex. Auto jumped to record 12.4%, easily beating the estimate of 5.5%.
The consumer is the pillar of sustainable economic growth. Therefore, consumer spending is one of the most-watched economic indicators as it points to what the central bank does next.
Higher consumer spending suggested by a sharp rise in the Retail Sales implies upward pressure on inflation. That, in turn, leads to higher inflation expectations, leaving the central bank on track to implement its inflation-targeting policy. Because almost all central banks have an inflation-targeting mandate, anything that points to inflation going to the target is viewed as the result of a successful monetary policy.
Is the Fed going to withdraw the stimulus now that the Retail Sales have bounced? Most likely, it will not. But the data shows that the Fed knows what buttons to push to revive the economy and to guide it out of recession. If anything, yesterday’s Retail Sales data validated the recent Fed’s action, much-needed, especially when running unconventional monetary policies.