Consumer spending grows in US

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Consumer confidence augurs well for stronger North American economy

Consumer confidence in the US is growing, according to recent retails sales data.

The growing confidence bodes well for a strengthening US economy that will help spur growth in Canada too.

US retail sales in July 2012 increased a stronger than expected 0.8 per cent with market expectations centered on a 0.3 per cent gain, according to recent data and economic update by RBC.

 The decline in June was deepened to -0.7 per cent from a previously estimated -0.5 per cent although the drop in May was lessened slightly to -0.1 per cent from -0.2 per cent. Motor vehicle sales once again defied the trend suggested by the unit sales numbers rising 0.8 per cent in the month.

“The unit sales numbers would have implied a 1.0 per cent decline in the month although there were anecdotal reports that the drop in July (and increase in June) largely reflected fleet sales to businesses rather than retail sales to households. Greater than expected strength, however, was evident even eliminating the effect of motor vehicles with sales rising 0.8 per cent compared to expectations of a 0.3 per cent increase” says Paul Ferley, assistant chief economist with RBC Economics.

Part of the strength in ex-autos reflected sales at service stations managing to break a pattern of three consecutive months of declines by gaining 0.5 per cent. This was in part helped by gasoline prices stabilizing although we had expected some lagged effect from earlier price declines. The unexpected gain was not solely explained by the service station component because if eliminated both it and motor vehicles sales still managed to increase a robust 0.9 per cent.

The component of retail sales that goes into the GDP add up, the so called control retail sales that excludes the motor vehicles, gasoline stations, and building materials components, was up a strong 0.9% following a 0.2 per cent drop in June and a 0.1 per cent gain in May.

“The July retail sales report augurs well for a strengthening in third-quarter 2012 consumer spending growth to a little less than 2 per cent relative to the 1.5 per cent recorded in the second quarter of 2012. This is expected to contribute to overall GDP growth showing a similar pattern by increasing by 2 per cent relative to the 1.5 per cent recorded in the second quarter of 2012.

“Although the Fed should take some encouragement from this strengthening, there will remain frustration that it is still too weak to translate into any sustained downward pressure on the unemployment rate. This is expected to result in monetary conditions remaining highly accommodative with the current 0 per cent to 0.25 per cent range for fed funds being maintained into 2014. In fact, if subsequent data point to this sub-par growth performance persisting until the end of the year, then the central bank could opt for additional stimulus such as another round of asset purchases,” states Ferley.

RBC Economics

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