Retail Sales Offer Promising Sign of Growth -- WSJ

By Ben Leubsdorf Features Dow Jones Newswires

Better consumer spending and confidence add to a growing body of evidence that U.S. economic growth is picking up this spring following another weak winter.

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Sales at U.S. stores, restaurants and online retailers increased a seasonally adjusted 0.4% in April from the prior month, the largest gain in three months, the Commerce Department said Friday. Also, the University of Michigan reported its consumer-sentiment index rose to 97.7 in early May -- the strongest reading since January, when sentiment reached a 13-year high.

The reports were a striking counterpoint in a week marked by dismal earnings reports by brick-and-mortar U.S. retailers like Macy's Inc., and Kohl's Corp. and Nordstrom Inc., which are struggling to adjust to a U.S. consumer shift to online shopping. On Friday, J.C. Penney Co. added to the parade of retailer gloom. It reported a surprise adjusted profit, but its revenue came in below expectations and investors yanked the stock down 14%.

Amid these woes, households are still spending, just in different places.

"We're going to have a nice strong consumer in the second quarter, and it's not surprising," said Diane Swonk, founder of consultancy DS Economics. "We've got more income. The labor market continues to improve."

Forecasters are increasingly confident that overall growth is rebounding after gross domestic product, a broad measure of U.S. output of goods and services, rose at a 0.7% annual pace in the first quarter. The Federal Reserve Bank of Atlanta's GDPNow model on Friday predicted a 3.6% growth rate in the second quarter, and Macroeconomic Advisers projected second-quarter growth at a 3.9% rate. If they're right, it will be the best quarter since the summer of 2014.

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That would be welcome news at the Federal Reserve, which wants to support a sustainable economic expansion without letting the economy overheat. Central-bank officials had largely shrugged off the weak first quarter as a likely one-off. Investors and analysts think another interest-rate increase is likely at the Fed's next policy meeting in mid-June, which would be its second this year. Still, rates remain historically low.

One potential concern for the central bank is the emergence of a lower trajectory for inflation. The consumer-price index rose 2.2% in April from a year earlier, the Labor Department said Friday. That's down for the second straight month from a 2.8% annual increase recorded in February. When excluding volatile food and energy costs, annual inflation is growing at the slowest pace since October 2015.

Early in the expansion, Fed officials worried that low inflation was a sign of low economic vitality. Now, with the unemployment rate at the lowest level in a decade, at 4.4%, Fed officials are more confident the expansion is on track and they are moving toward gradually raising interest rates.

The economy-wide April gain in retail sales was slightly below economists' expectations, but March sales were revised up to a 0.1% increase from an earlier-estimated decline. "If you look at the revisions, it's actually a very strong report," Ms. Swonk said.

The report highlighted the continuing shift in consumer spending from traditional shopping malls and storefronts to online platforms, a trend that has pressured many big-name retailers. In April, nonstore retailer sales -- a category that includes online shopping -- jumped 1.4% from the prior month, while sales at department stores rose 0.2% from March. Over the past year, nonstore sales rose 11.9% and department-store sales fell 3.7%.

Macy's, J.C. Penney and Kohl's each reported sales declines for their fiscal first quarters. "We're not banking on a rebound in consumer spending for the remainder of the year," said Karen Hoguet, Macy's finance chief, in an interview. The retailer has experienced nine straight quarters of same-store-sales declines, but Ms. Hoguet exhorted, "don't count us out. We're not dead."

On the brighter side, the chains noted that business improved in March and April after a weaker-than-usual February. Penney Chief Executive Marvin Ellison said sales excluding newly opened or closed locations turned positive in March and April after "the very difficult month of February."

Like other retailers, HSN -- the former Home Shopping Network -- has seen customer behavior change in recent years. President Bill Brand said in an interview about half of HSN's sales now come via the web and mobile devices.

"Maybe fewer people are watching TV, and how they're consuming content is different than they have in the past," he said. "We've seen a shift."

Friday's government report on retailing offered an early but incomplete look at consumer spending in the current quarter; it excluded outlays on most services including medical care and housing. It showed sales rose in April at home-improvement stores and restaurants, but fell at grocery and clothing stores.

U.S. GDP growth has repeatedly weakened during the first quarter in recent years, which some economists have attributed to seasonal-adjustment problems.

This year, the first-quarter slowdown in spending reflected a number of factors. Car sales dropped, Americans spent less on home heating due to mild winter weather, and some households experienced delays in receiving tax refunds from the Internal Revenue Service.

But the lull seemed likely temporary given underlying health in the economy. Consumer-sentiment gauges jumped following last year's presidential election and have remained elevated. Moreover, employers have been adding to payrolls at a clip of about 185,000 a month this year, bolstering household incomes.

Suzanne Kapner, Eric Morath and Ben Eisen contributed to this article.

Write to Ben Leubsdorf at ben.leubsdorf@wsj.com

(END) Dow Jones Newswires

May 13, 2017 02:47 ET (06:47 GMT)