U.S. Suffers Weak Retail Sales, Leads to a GDP Forecast Downgrade

Retail sales failed to rise in April, causing the Federal Reserve to lower its GDP forecast as Americans are slow to spend and stimulate the consumer-driven economy.

Retail sales failed to rise in April, causing the Federal Reserve to lower its GDP forecast as Americans are slow to spend and stimulate the consumer-driven economy.

According to the Census Bureau, retail sales were “virtually unchanged” from the previous month, with $436.8 billion in sales. Analysts had expected growth of 0.2%, as improving weather and higher energy costs drove dollar-denominated sales and spurred total spending growth. In reality, Americans are not spending more even with the higher oil prices. Excluding gasoline, retail sales were also unchanged.

The only strong gain seen in April was in retail and food service sales, which rose 3.6% on a year-over-year basis excluding gasoline.  Offsetting that gain was a 1% decline in electronic sales on a year-over-year basis, and a 1.9% decline of department store sales.  In total, retail sales rose 0.9% on a year-over-year basis, the slowest growth rate since October 2009.

Since the global financial crisis of 2009, retail sales excluding food services have seen mostly strong gains above 2.5% or more, peaking at over 7% in 2010 and again in 2011. However, the rate of retail sales growth has continued to decelerate from the peak in 2011, and has remained below 5% since the middle of 2013.

Debt Rises

Despite the weak growth in consumer spending, debt levels in the United States are rising.

Total household debt balances rose to $11.85 trillion by the end of the first quarter of 2015. Non-housing debt rose 0.7%, “largely due to increases in student loans,” which added $32 billion to American debt in the first quarter of the year.

Despite the rise in debt, less Americans are struggling to pay off their debts, according to the report. Delinquencies, foreclosures, and bankruptcies fell in the first quarter of the year, with the percentage of outstanding debt in one stage of delinquency falling to 5.7%, a 0.3-point decline from the previous quarter.

The Census Bureau said a fall in home foreclosures led the decline. “Tight standards on mortgage lending are reflected in both sluggish growth in housing debt as well as substantial reductions in mortgage delinquency and defaults, “said Andrew Haughwout, Senior Vice President and Economist at the New York Fed.

Weakening Forecast

With retail sales flat and debt rising, the Atlanta Federal Reserve sees GDP growth moderating, according to its GDPNow model, which assessed recent data to forecast a 0.7% rate of GDP growth for the second quarter.  Although a new and controversial tool, the GDPNow is gaining more attention after the first quarter’s weak growth of just 0.2%, far below most expectations. The Atlanta Fed was closest with its expectation of 0.1% growth when traditional modeling methods called for 1% growth expectations.

While most traditional economists and economic models argue that the first quarter’s weakness was mere volatility, the GDPNow suggests that weak growth will continue into the second quarter because of weak retail demand and moderate improvement in payrolls.