Americans consumers picked up the pace of their spending in May despite rising trade tensions.
Retails sales–which includes shopping at stores, restaurants, and online–rose a seasonally adjusted 0.5 percent in May, the Commerce Department said Friday. April’s sales were revised from an initial report of a 0.2 percent decline to a 0.3 percent gain. March sales were also revised upward.
Auto sales, which have been weak recently, rose 0.7 percent. Building materials, another weak spot in recent reports, picked up by 0.1 percent.
Restaurant sales were up 0.7 percent, a very strong showing for a highly discretionary category. Americans spending more to eat out is typically a sign of economic buoyancy.
The so-called “control group”–a subset of retail sales that excludes autos, gas, and construction materials–rose 0.5 percent in May. April’s figure went from flat to a 0.4 percent gain. The control group is used to calculate personal consumption expenditures, a component of GDP. As a result of the upward revision to April and stronger-than-expected May, together with healthy industrial production figures released by the Fed Friday, economists’ estimates of growth in the second quarter are likely to rise.
The Atlanta Fed’s GDPNow real-time estimate of Gross Domestic Product jumped to 2.1 percent on Friday, up from a previous reading of a dismal 1.4 percent and the highest estimate so far.
U.S. consumer sentiment had improved in May compared with April. But the University of Michigan said that it declined again in the beginning of June, largely due to worries about tariffs on Mexican and Chinese imports. The share of respondents spontaneously and negatively mentioning tariffs jumped to 40 in early June, up from 21% in May. With the Mexico tariffs now seemingly off-the-table, sentiment could bounce back at the end of the month.
Ironically, tariff worries could give spending a boost as consumers rush to buy before tariffs are applied.
“The sole component of the Sentiment Index that improved in early June was buying plans for large household durables. That improvement, however, was due to consumers favoring tariff induced buy-in-advance price rationales,” said Richard Curtin, the chief economist for University of Michigan’s Survey of Consumer Sentiment.
At odds with that interpretation, however, consumer expectations for inflation fell to their lowest level ever. If consumers do not expect prices to rise, the buy-in-advance rationale would not seem to hold.