July 18, 2018

Strong U.S. retail sales lift second-quarter GDP estimates

U.S. retail sales rose solidly in June as households boosted purchases of automobiles and a range of other goods, cementing expectations for robust economic growth in the second quarter.

Signs of a strengthening economy, together with a tightening labor market and firming inflation, likely will keep the Federal Reserve on track to continue raising interest rates this year.

Fed Chairman Jerome Powell offered an upbeat assessment of the economy last Friday, telling lawmakers that “over the first half of this year, overall economic activity appears to have expanded at a solid pace.” The U.S. central bank raised interest rates in June for the second time this year and has forecast two more rate hikes by the end of 2018.

“This puts the economy in a very, very good position as it starts its 10th year of forward movement in July,” said Chris Rupkey, chief economist at MUFG in New York. “This strengthening economy gives the Federal Reserve the green light to raise rates a third time this year at their September meeting.”

The Commerce Department said on Monday retail sales increased 0.5 percent last month. Data for May was revised to show sales rising 1.3 percent, the largest since September 2017, instead of the previously reported 0.8 percent gain.

TARIFFS POSE A THREAT

In addition to the solid retail sales data, a sharp narrowing of the trade deficit in April and May has also bolstered expectations of a strong GDP reading for the second quarter. Second-quarter growth expectations were supported by another report from the Commerce Department on Monday showing business inventories increased 0.4 percent in May.

Forecasting firm Macroeconomic Advisers raised its April-June quarter GDP growth estimate to a 5.1 percent annualized rate from 4.9 percent. The economy grew at a 2.0 percent pace in the first quarter. The government will publish its snapshot of second-quarter GDP later this month.

Escalating trade conflicts, however, pose a risk to the economy’s outlook. The United States is embroiled in tit-for-tat import tariffs with major trade partners, including China, Canada, Mexico and the European Union.

Concerns about trade tariffs are starting to have some impact on both consumer and business confidence.

Consumer sentiment dipped in early July and a survey by the New York Fed published on Monday showed a moderation in factory activity in New York state in July amid a pullback in new order growth and shipments. Firms were also less optimistic about business conditions over the next six months.