Retail sales up in spite of taxes and looming cuts

Internet sales

Increased internet sales partially drove the spending boost in February. Image: garethjmsaunders/Flickr/CC BY-SA

According to a Commerce Department report on Wednesday, March 13, retail sales grew from January to February by the largest margin seen in five months, and nearly double what some economists had predicted. That gain is likely driven by improved labor and housing markets, as well as rising stock prices.

Retail sales increase a ‘positive indicator’

Consumer spending drives 70 percent of the economy, so it is encouraging that retail sales rose 1.1 percent last month. That may not sound significant, but it is the largest single month of such growth since last fall, and another indicator that the economy is getting back on track in spite of raised taxes, pending budget cuts and volatile fuel costs.

Robust auto, building material, internet sales

According to the U.S. Department of Commerce, the increase was fueled by robust sales in the automotive and construction material industries. Sales were also brisk for online retailers.

Core sales, which excludes volatile goods, such as fuel and food, rose by 0.4 percent from January to February. Meanwhile, January’s previously-reported 0.1 percent core sales growth rate was seasonally-revised up to 0.3 percent.

Discretionary spending down, following tax hike

Restaurants and bars, however, saw a 0.7 percent reduction in sales. That, coupled with a 0.8 percent gain in grocery sales, indicate that consumers are adjusting to the 2 percent increase in payroll taxes they were hit with at the beginning of the year.

“[The report is] a positive indicator that consumers are adjusting to the higher payroll taxes and higher gasoline prices,” Russell Price, the senior economist at Ameriprise Financial Inc., told Bloomberg. “People are encouraged by the employment gains we’ve seen.”

Will the trend continue?

Some analysts, bolstered by the better-than-expected report, believe that the trend will continue. Paul Dales, an analyst at Capital Economics, said, “This all suggests that the hit to spending from the payroll tax cut and higher gasoline prices, which reduce the amount of cash available to spend on other items, hasn’t been too bad. The recent pickup in both employment and earnings growth bodes well for consumption growth later in the year, too.”

However, with budget cuts still looming, others are taking a more cautious approach. Kathy Bostjancic, an economist at the Conference Board, said, “The key to where spending is headed this spring and summer is whether the momentum from the housing market can deliver impetus to consumer spending power and sentiment to offset the negative drag from budget cuts.”


Daily Finance
Los Angeles Times

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