March Retail Sales - Increased Gas Spending Masks Moderation Elsewhere

March retail sales up 6.9% (nominal) and down 1.6% (real) year-over-year.  Increased spending on gasoline (+37% YoY) accounted for more than a third of the nominal increase as several more discretionary-oriented categories slowed or declined.  It is important to note that we are entering a period of extremely difficult prior-year comparisons.  Retail sales grew by 30%, 53%, and 28% in March, April, and May 2021, respectively (see spike in the chart below).  Those unprecedented levels of growth were driven by a general economic reopening, stimulus checks, and also by extremely easy comparisons from 2020 when retail sales declined 6%, 20%, and 6% in March, April, and May (see drawdown in the chart below).  These so-called base effects are likely exaggerating the levels of growth or contraction we are seeing. That said, heightened inflationary pressures exacerbated by the Russia/Ukraine conflict clearly pose a threat to consumer demand and therefore economic growth.  In an effort to combat inflation, the Federal reserve has become increasingly hawkish in tone and action, emboldened by a labor market that remains robust.  Historically, real year-over-year declines in retail spending (as reported today) have been one of many leading indicators of a recession although this indicator alone has proven more volatile and has produced several false positives over the years, including in the late 1980’s which shared some of the same inflationary dynamics we are experiencing today.  In the context of other recession indicators we monitor including unemployment levels and the yield curve, we continue to believe the likelihood of entering a recession in the next twelve months remains low.

March retail sales up 0.5% month-over-month (-0.7% adjusted for inflation).  The overall value of retail purchases increased 0.5% in March after an upwardly revised 0.8% rise in February.  The March outcome included an 8.9% month-over-month jump in gas receipts, which masked more mixed results in other categories.   The war in Ukraine has caused commodities prices to skyrocket, adding to cost pressures and driving gasoline prices to record highs.