US retail sales rebounded strongly in May with sales ex auto and gasoline up 0.7% m/m and the control group (ex food, gasoline, building materials and autos) increasing a similar 0.7% m/m. Gains in sales were broad-based across categories and strong auto sales combined with higher gasoline prices added to headline sales which increased 1.2% m/m.
On top of the healthy May data, there were upward revisions to sales in April and March. The control group was thus revised 0.1pp higher in April and 0.4pp in March. Thus the pace of core retail spending over the past three months now looks much better than in April. The control group was up 3.7% annualised over the past three months in the May retail sales report compared to -0.7% in the April release.
Adjusting for inflation, real personal spending is now on track to post a 0.5% m/m increase in May. Taking the revisions to April and March into account, Q2 real personal spending growth is now tracking just above 3% q/q AR and Q1 spending is likely to be revised up from 1.8% to 2.0%.
Fundamentally, Q1 personal spending was too slow compared to real income growth and household wealth gains. We are now seeing the rebound in consumption that we had expected and we see potential for continued strong private consumption growth in coming months.
According to Danske Bank Markets "Today's retail sales report adds to the run of recent positive data from the US which in our view will give the Fed more confidence in its base line expectation that Q1 weakness was primarily caused by temporary factors. The upcoming FOMC meeting next week will be very interesting in this respect but overall we continue to believe that the Fed will deliver a first rate hike in Sept this year followed by an additional 100bp per year over the coming months."
