Can Big March Thaw In Retail Sales Grow The Economy?

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Retail sales grew at the fastest pace in 18 months during March, suggesting that consumers and the economy may be finally emerging from winter hibernation.

Sales rose a seasonally adjusted 1.1% from February, the Commerce Department said, more than the 0.7% expected. It was the strongest month-to-month gain since September 2012.

Auto sales, which rose 3.1%, helped propel sales overall. But even with auto sales stripped out, the resulting 0.7% increase was the best since February 2013. Most sectors saw a rise, and February data were revised up strongly.

Retail sales figures can be volatile from month to month but have been trending higher the past few years. Economists watch the data closely, as consumer spending accounts for about two-thirds of the economy.

Other recent economic data offer convincing reasons for the March bump. Aggregate wages rose 0.7%, the Labor Department said earlier in the month. Gasoline prices fell, said Stuart Hoffman, chief economist at PNC Financial Services Group, giving consumers a little extra discretionary money. Stocks and home values both rose, contributing to a wealth effect, he says.

"This is real consumer spending, real demand," Hoffman said.

Debating Winter's Impact

After two months of harsh winter weather, says National Retail Federation chief economist Jack Kleinhenz, those consumers were releasing some pent-up demand when they went shopping in March.

"Improving economic conditions and consumer confidence should push consumers to return to spending habits this spring," he said in a statement. "We remain optimistic that retail sales will continue their positive march this spring."

With the winter in the rearview mirror, a combination of factors bode well for the economy in 2014. Hoffman thinks the second quarter will compensate for the weakness in the first, and the second half will mark a "break out of the 2% zone that we've been in for years."

Some economists disagree on how much the weather has impacted the economy. Hoffman thinks that weather as an explanation for sluggish activity in January and February "hits the nail on the head" and that the thaw in March proves it.

Jeffrey Rosen, chief economist for Briefing.com, is more skeptical. Internet sales -- a category that the weather is not likely to influence -- rose 1.7% on the month in March, he noted. "I've always been in the camp that says winter was overblown," Rosen said.

Rosen thinks that wage growth accounts for most of the sales gains. The length of the workweek and hours worked rose, the latter to a multiyear high. It means that businesses will need to step up hiring and boost hours and wages more than they have in the past few years.

"We've had low growth and businesses at record high profits, suggesting they can run lean," he said. "But in the end, consumers can only buy if they have income growth."

But other economists believe that sluggishness in the winter will result in pent-up demand being pushed forward into 2014.

Sal Guatieri, senior economist with BMO Capital Markets, wrote in a note to clients that the March data bring expectations of spending growth from a 2.0% gain in Q1 to "a complete recovery" in Q2, setting up an annualized 3 1/2% increase in 2014. That will help boost GDP, Guatieri noted.

Michael Niemira, chief economist at the International Council of Shopping Centers, said that the rosy March data were received with relief. "It's a story we all hoped would be in the numbers," he said.

"We knew that weather depressed January and held back February, and we were looking for that rebound in last week's chain-store sales numbers. But the weak weather-induced chain-store sales numbers didn't make the case as strongly and as convincingly as the retail sales did today."

He says the Commerce Department report showed nice gains in retail sales in several store categories, such as general merchandise, clothing and building materials.

Sales at general-merchandise stores, which include giants such asWal-Mart Stores ( WMT ) andTarget ( TGT ), increased 1.9%, while building-materials and garden-supply stores, such asHome Depot ( HD ) andLowe's ( LOW ), rose 1.8%.

Another housing-related category, home-furnishings stores, posted a 1% gain. It was likely good news for retailers such asBed Bath & Beyond ( BBBY ),Restoration Hardware Holdings (RH) andWilliams-Sonoma (WSM).

Sales at clothing and accessories stores, which include giant apparel retailerGap (GPS) and women's clothierAnn (ANN), rose 1% in pent-up demand from the prior two months.

The Discount Dilemma

Two big-ticket consumer questions remain. Auto sales bounced back nicely in March, to an annualized 16.4 million pace, the fastest in more than seven years. But automakers had to offer deep discounts to entice consumers in March. Still, most economists think that while the pace will ease a bit, it will stay strong, since the average age of cars on the road remains high. Hoffman expects sales of 16 million in 2014.

The housing market is another question. Rosen said that the combination of higher interest rates and higher home prices is "concerning" in its impact on demand. Declining sales mean less demand for construction and less price appreciation for current homeowners. It also hits retail sales, since homebuying tends to lead to increased demand for home furnishings, building materials and electronics.

Still, the March pop in retail spending jibes with other brightening economic data. Consumer sentiment rose to a nine-month high last week. Producer prices also rose faster than expected in March, a positive sign of more demand in the economy.

Even mortgage-purchase applications rose 3.0% in the week ended April 4, the third straight week of gains and a possible sign that winter's grip on the housing market may be easing. Homebuying is "the most weather-sensitive of all," Hoffman said. "I think we'll see a pretty good rebound in homebuilding and homebuying, and that would be the icing on the cake," he added.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: WMT , TGT , HD , LOW , BBBY

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