markets

Tax Cuts, Gas Prices to Duke It Out in U.S. Retail-Sales Report

  • Rising fuel costs are eating into income gains, economists say
  • Data may indicate strength of second-quarter spending rebound

Finding Retail's Bright Spots Ahead of Earnings

Two burning questions may be answered with Tuesday’s retail-sales report: How much are lower taxes boosting U.S. economic growth, and how much are higher gasoline prices hindering it?

The median projection in a Bloomberg survey of economists calls for a 0.3 percent rise in April retail sales from the previous month. A broad advance would indicate bigger take-home pay is more than compensating for a pickup in fuel costs to a level last seen in late 2014. However, higher receipts that are concentrated at service stations would indicate gasoline purchases are eating into discretionary sales at other merchants.

The Commerce Department’s retail data are also the first look at whether consumer spending began the second quarter on a strong note or rebounded only modestly after a weak first three months of 2018.

When President Donald Trump signed tax cuts into law at the end of 2017, they were billed as providing a jolt to consumption and business investment that would spur growth toward the president’s 3 percent goal. Four months into this year, analysts seem divided on how Americans’ spending -- which is about 70 percent of the economy -- will shake out as the tax benefits are eroded by higher prices at the gas pump.

“Rising gasoline prices are likely to persist, eating away at some of the positive after-tax income gains seen post-tax reform,” Michelle Meyer, head of U.S. economics at Bank of America Corp., and colleagues wrote in a note Friday. She also cited colder-than-normal weather last month as a temporary headwind for retail sales. While “cautiously optimistic on the trajectory of consumer spending,” Meyer said that “a weak reading in April raises the specter of another disappointing quarter of consumer demand.”

Because the government’s figures aren’t adjusted for price changes, more expensive fill-ups probably boosted the results. What’s more, motor-vehicle sales were softer. A more useful measure is so-called retail control-group sales, which are used to calculate gross domestic product and exclude food services, auto dealers, building-materials stores and gasoline stations. That number is forecast to advance 0.4 percent, the same as in March.

What Our Economists Say

April retail sales will be the most important economic data point of the week, as they are expected to provide confirmation that the consumer soft patch in the first quarter was limited to that period. The resilience of consumer attitudes and profile of employment-generated income suggest that households are well-positioned for a rebound in spending in the current quarter

--Carl Riccadonna and Niraj Shah, Bloomberg Economics 

Based on the company’s credit and debit card spending data, Bank of America’s economists project both headline and control-group retail sales increased a more modest 0.2 percent because of the impact of higher fuel bills on discretionary spending.

While JPMorgan Chase & Co. analysts expect household purchases will firm up from weakness in early 2018, they reckon faster inflation due to higher energy costs will play a bigger role in limiting price-adjusted spending this quarter than it did a year earlier. Faster price gains will also trim the boost to incomes after taxes, JPMorgan said.

There are signs that consumers are emerging from a first-quarter soft patch, “but also that the tax cuts passed at the end of last year have not clearly buoyed consumer spending,” Daniel Silver, an economist at JPMorgan, said in a note Friday.

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