U.S. Advance retail sales in May

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1 Contacts Felix Boni Chief Credit Officer Jordy Juvera Economics Associate Cynthia Pérez Economics Analyst HR Ratings comments on the continued strength of retail sales in May suggesting a strong 2Q18 for consumer goods spending, this coming after a weak first quarter performance. The advanced retail sales report for May shows an increase of 0.83% over the strong 0.36% 1 rise in April vs. March, in seasonally adjusted nominal terms. For the quarter ending in May retail sales rose at an annualized rate of 5.16% (please see below table) vs. the three-month period ending in February and were 5.25% over the same period in To determine what this might mean for the second quarter, a 0.50% rise in June vs. May would translate into an annualized 2Q18 vs. 1Q18 advance of 6.55%. Furthermore, assuming roughly the same 2% annualized goods inflation this would result in an annualized increase of 4.46%, a major rebound from the -0.60% change in 1Q18 vs. the strong fourth quarter showing. Total consumer spending growth would probably be less given the expected more modest advances in services which in the last two quarters represented 68% of total consumer expenditures in nominal terms. The strength in retail spending is one of the reasons for the Fed s vision of a strong US economy and some current expectations which believe that US GDP could increase by as much as 4.0% on an annualized basis in the second quarter vs. the first 2. A 4% growth would probably require an even more robust rebound in goods consumer spending, an unusually strong advance for services while investment would have to continue at the rapid pace set in 1Q18. May Seasonally Adjusted Monthly Retail Sales in Millions of USD (3MMA) May-17 Feb-18 May-18 YoY Change QoQ Change* Retail and Food Services, Total 473, , , % 5.16% Total excluding Food Services 417, , , % 4.82% Total excluding Motor Vehicles & Parts 375, , , % 5.23% Total excluding Gasoline Stations 436, , , % 4.87% Total excluding Food and Gasoline 380, , , % 4.45% Food Services 56,055 57,372 58, % 7.75% Motor Vehicles and Parts Dealers 97, , , % 4.89% Gasoline Stations 37,323 41,412 42, % 8.39% Source: HR Ratings w ith data from the U.S. Census Bureau, retrieved from FRED, Federal Reserve Bank of St. Louis. One of the major reasons for the growth in retail sales is the surge in gasoline spending which is increasing in large part due to rising gasoline prices. Gasoline sales rose by 2.0% in May vs. April and 8.39% at an annualized rate for the quarter ending in May vs. the February quarter. However, excluding gasoline, retail sales still advanced by an impressive 0.72% in the month of May. For the quarter these increased at an annualized rate of 4.87%. Eliminating both food and gasoline, the annualized increase was 4.45%. Compared, for example, to total retail sales (5.16%) and sales excluding motor vehicles and parts (5.23%), the increase for total sales excluding food and gasoline (4.45%) appears to 1 The 0.36% was encouraging as it followed a strong 0.72% advance in March vs. February. 2 In the first quarter annualized GDP growth vs. the immediately preceding quarter was 2.17%. Hoja 1 de 5

2 May-12 Aug-12 Nov-12 Feb-13 May-13 Nov-13 Feb-14 May-14 Nov-14 Feb-15 May-15 Nov-15 Feb-16 May-16 Nov-16 Feb-17 May-17 Nov-17 Feb-18 May-18 U.S. Advance retail sales in May be relatively low. However, it is relevant to consider that this aggregation excludes important categories of non-durable goods and thus has a relatively high proportion of durable goods. Consequently, to appreciate the possible implications of these nominal increases for real term growth, differential inflation rates should be considered. Durable goods inflation generally is negative. For the quarter that ended in April vs. January and for that quarter vs. the three-month period that ended in October inflation was roughly -2.0% at an annualized rate. For its part, non-durable goods inflation was 1.89%, significantly less than the 3.99% in the January quarter but still far from negative. Nondurable goods inflation is influenced by food and gasoline with the recent strong increases largely due to gasoline. Thus, the relatively low 4.45% increase for sales excluding important non-durable components of food and gasoline is probably more impressive than it otherwise would appear given negative durable gods inflation. Thus, the retail sales report for May definitely is good news. There are, however, important caveats:1) what is the growth in services and in other GDP components, 2) to what degree is the strong rebound in consumer goods expenditures sustainable as opposed to being largely a rebound from a weak first quarter (which in turn was weak, representing a period of consolidation from the strength of the fourth quarter). In Graph 1 we show the close relationship between retail sales and consumer goods spending, justifying using the former to make assumptions about the latter. Especially relevant is how the decline in recent months reflects the unusual strength toward the end of last year. Now we are currently seeing a rebound from the weakness in the first couple of months of The recent volatility makes it difficult to determine the implications of current numbers for the rest of the year. Graph 1: Retail Sales and Consumer Goods Spending annualized change (3MMA) 13.0% 11.0% Retail Sales Consumer Goods 9.0% 7.0% 5.0% 3.0% 1.0% (1.0%) (3.0%) (5.0%) Source: HR Ratings w ith data from the U.S. Census Bureau and BEA and retrieved from FRED, Federal Reserve Bank of St. Louis. In Graph 2 we show the YoY evolution of different categories of retail sales. Especially relevant is the deviation of the evolution of total sales excluding gasoline. This is despite the fact that gasoline sales represent approximately only 8.5% of total retail sales. Hoja 2 de 5

3 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Dec-13 Apr-14 Dec-14 Apr-15 Dec-15 Apr-16 Dec-16 Apr-17 Dec-17 Apr-18 May-13 Nov-13 Feb-14 May-14 Nov-14 Feb-15 May-15 Nov-15 Feb-16 May-16 Nov-16 Feb-17 May-17 Nov-17 Feb-18 May-18 U.S. Advance retail sales in May Graph 2: Retail sales annual change - excluding key categories (3MMA) 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Total Retail Sales Total excluding food services Total excluding motor vehicles & parts dealers Total excluding gasoline stations Source: HR Ratings w ith data from the United States Census Bureau and retrieved from FRED, Federal Reserve Bank of St. Louis. Based on nominal seasonally adjusted data In Graph 3 we show the comparative evolution of overall consumer goods inflation and durable goods inflation, on an annual basis. The gap, including negative durable goods inflation, reflects the importance of properly interpreting the nominal retail sales data for different components, including both durable and non-durable goods. Graph 3: Year over year monthly change in PCE goods inflation 5% 4% 3% 2% 1% PCE Goods Inflation PCE Durable Goods Inflation 0% 1% 2% 3% 4% Source: HR Ratings w ith data from the Bureau of Economic Analysis and retrieved from FRED, Federal Reserve Bank of St. Louis. Based on nominal seasonally adjusted data Hoja 3 de 5

4 HR Ratings Senior Management Management Chairman of the Board Vice- President Alberto I. Ramos Aníbal Habeica Chief Executive Officer Fernando Montes de Oca Analysis Chief Credit Officer Chief Operating Officer Felix Boni Álvaro Rangel Public Finance / Infrastructure Financial Institutions / ABS Ricardo Gallegos Fernando Sandoval ricardo.gallegos@hrratings.com fernando.sandoval@hrratings.com Roberto Ballinez roberto.ballinez@hrratings.com Corporates / ABS Methodologies Luis Quintero Alfonso Sales luis.quintero@hrratings.com alfonso.sales@hrratings.com José Luis Cano joseluis.cano@hrratings.com Regulation Chief Risk Officer Head Compliance Officer Rogelio Argüelles Rafael Colado rogelio.arguelles@hrratings.com rafael.colado@hrratings.com Business Development Business Development Francisco Valle francisco.valle@hrratings.com Hoja 4 de 5

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