The American consumer stands firm
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We don't know yet how the Iran war and the resulting surge in energy prices will ripple through the U.S. economy. We do know that American consumers were in pretty solid shape before it all began.
The big picture: New retail sales and employment data out Wednesday morning point to an underlying strength in consumer demand, propped up by wages that have kept rising.
- The question for the months ahead is whether the underlying trends that have kept consumers afloat — including a buoyant stock market and a low-layoff job market — can power it through an era of war-induced shocks and weak hiring.
Driving the news: Retail sales rose 0.6% in February, the Census Bureau said, reversing a January slump. Core control sales, which feed into GDP data, were up a similarly robust 0.5%, or 0.2% adjusted for inflation.
- Sales at auto dealers, recreational and sporting goods, and apparel were all strong — discretionary spending categories.
- Separately, payroll processor ADP said that private employment rose by 62,000 in March, the second consecutive month it found solid job creation.
- Also Wednesday morning, the Institute for Supply Management said manufacturing activity expanded for the third straight month in March, with its index of activity ticking up to 52.7, from 52.4.
Of note: The standout indicator in the report, however, was pay growth, which continues to hold up despite relatively sluggish jobs growth.
- "Jobs may be a bit modest when we look out over the last couple of years, but pay is telling a different story — that there is still a little bit of tightness in this labor market," ADP chief economist Nela Richardson told reporters Wednesday morning.
- "Pay growth continues to be solid and that is good support for workers generally," she said.
- One caveat: Hiring has been concentrated in health care, particularly sub-sectors that tend to offer lower-paying jobs.
Reality check: Consumers faced new headwinds in March that make the outlook for personal consumption in the coming months cloudy.
- Gasoline prices rose steadily over the course of the month, from just under $3 to more than $4 a gallon.
- The stock market turned wobbly, with the S&P 500 down 5.1% for the month (and down more before a remarkable surge in Tuesday's trading).
- Extra-large tax refunds due to last year's One Big, Beautiful Bill Act have been forecast to create a surge of demand in the first half of the year, but so far the average refund has been at the lower end of forecasts.
What they're saying: The February sales data "confirmed that U.S. consumers are still spending, with little evidence of retrenchment so far," EY-Parthenon senior economist Lydia Boussour wrote in a note.
- "But that strength masks a fragile and uneven underlying foundation ahead of escalating tensions in the Middle East."
- "Looking ahead, we expect households to become increasingly selective rather than pull back abruptly," Boussour wrote. "Higher fuel costs will act as a tax on consumption, crowding out discretionary spending and leading to demand destruction in price-sensitive categories."
