KEY DATA: Retail Sales: +1.1%; Excluding Vehicles: +1%/Import Prices: +1.1%; Non-Oil: 0%
IN A NUTSHELL: "At least so far, the increase in taxes has had minimal impact on household spending, showing that the economy retains a lot of momentum."
WHAT IT MEANS: Surprise, surprise, rising taxes don't slow economic growth. Well, maybe not so far. Consumers went out and spent lots of money in February led by a jump in vehicle purchases and gasoline sales. The rise in gasoline expenditures was more a result of a surge in prices than demand so that has to be backed out. But even if you remove vehicles and gasoline, a measure referred to as core-retail sales, there was still a solid increase in spending. However, the February report was not very even. While gasoline stations and vehicle dealerships did well, restaurants, sporting goods, furniture, appliance and department stores posted declines. We bought more clothing but the improvement in supermarket sales may have been driven by rising prices. Indeed, imported food costs jumped in February, adding to the consumer woes being created by the hike in energy costs. It looks like the housing recovery is beginning to have an impact on building supplies such as lumber. As for exporters, they seem to be pushing up the prices of all types of products as food, energy and most other prices of goods sold to the rest of the world increased.
MARKETS AND FED POLICY IMPLICATIONS: Before any politician in Washington gets out of control and remarks that raising taxes leads to more spending, let's take a breather here. The jump in retail sales was really nice to see and with the January demand revised upward, it looks like first quarter growth will be stronger than most other economists have expected. Since everyone knows I have been and continue to be the outlier on growth, I am the logical one to crow. But I am worried. The retail sales increases were not broadly based. I need to see that happen before I think all is well with consumers. But more importantly, it is hard to think that the impact of the end of the payroll tax holiday will not ultimately cause many low and middle income households to moderate spending. At this point, they may be fighting to maintain their standard of living but how long that will last is unclear. I suspect that consumer spending will moderate but still be decent going forward: The jump in employment and income will allow that to happen. It is the strong consumer demand that we really need to turn the corner that is in question. Additionally, we will not see the full impacts of sequestration for months. All we can hope for is the economy building up enough momentum before all the impacts hit that we wind up with moderate rather than sluggish growth. Of course, if the dumb sequestration is ended, then my forecast of solid growth this year and strong growth next could come about. Investors are likely to love this number though how long a winning streak can be sustained is anyone's guess. As for the rise in import and export prices, that is a warning that an improving world economy could lead to some inflation pressures in the future. But it will take a lot stronger U.S. economy before we will have to worry about that happening.