Retail sales rose by 0.5% in May, beating expectations of a 0.2% increase from the prior month. Excluding vehicle and gasoline sales, the gain was also 0.5%. Revisions to the April sales were bumped higher, from a preliminary negative reading to a gain of 0.3%.
Consumer spending on vehicle sales surged in May, rising by 0.7%, offsetting weakness in the prior month and providing some reassurance about the broader mood of consumers.
Also of note was the resurgence in sales by nonstore retailers, which grew by a solid 1.4% for the month, coming off a very light 0.5% increase in April.
All things considered, the consumer sector remains in relatively good shape, supported by robust labor market conditions and moderate wage growth. Still, weak job creation last month was a signal that slower growth is likely having an impact on hiring decisions. The fact that the number of job openings outstrips the ranks of the unemployed is also playing a role, making it difficult to find qualified candidates to fill open positions. The combination will make it difficult to sustain a brisk pace of job creation, which could weigh further on spending growth at some point.
With the Fed meeting next week and a growing sense that a rate cut may be on the table in the next few months, the solid result for May and upward revision to April sales help the case for policymakers to hold steady for now.
All in all, the near-term picture remains largely unchanged. The baseline view is for the expansion to continue, but the possibility for growth to disappoint appears greater than the potential for an upside surprise. A trade deal with China would go a long way toward relieving a key source of uncertainty, but the chances of a deal in the near term appears to be quite low.
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