INDICATOR: March Retail Sales
KEY DATA: Retail Sales: -0.4%; Excluding Autos: -0.4%; Gasoline: -2.2%
IN A NUTSHELL: "We have been waiting to see the impact of the tax increases on household spending and it just might finally be showing up."
WHAT IT MEANS: For a while it looked like consumers would power through their loss of spending power from the tax increases but ultimately, economics wins out. Retail sales softened in March and the cut backs were broad based. Yes, there was a large fall off in gasoline purchases that was due to a pretty sharp drop in prices. But demand for vehicles, sporting goods, health care products, general merchandise, appliances and electronics were all off. Food, clothing and building supply sales were largely flat but we did shop online and eat out. The housing boom seems to be triggering a rebound in furniture purchases, though this sector remains quite volatile.
MARKETS AND FED POLICY IMPLICATIONS: I keep saying that there is no such thing as a free tax increase or spending cut and ultimately we were going to see the negative side of those actions. That day is approaching quickly if it hasn't already arrived. Has the end come to consumer spending? Hardly. Let's not forget that retail sales soared by 1% in February so some pay back should have been expected. We are seeing a lot of ups and downs in the data but this one needs to be watched because there are reasons to think the consumer is not going to be able to sustain strong spending: Job growth has been mediocre, wage gains remain largely nonexistent and the cumulative impact of the tax increases and ultimately government worker furloughs and spending cuts should slow income growth. Put those factors together and you understand why a weaker than expected sales number is something to show some concern about. The economy continues to expand and first quarter growth should be decent. But decent is not good enough nearly four years after the end of the recession. Government needs to stop being stupid and we need some help from the rest of the world if the expansion is to change gears. Since an intelligent Congress is an oxymoron and we can do little about Europe, don't expect booming growth to appear soon. That is why investors are happy. Mediocre growth means lots of Fed liquidity and that is good for the equity markets, even if it is not doing a whole lot for the real economy.