Monthly Economic Review: May 2019

Economy shakes off a tumultuous winter with spring growth
MER May 2019

It’s been an interesting year already. Late in 2018 and early in 2019, the economy faced a soft patch with a steady run of weak data and definite headwinds. The erratic stock market, uncertainties around the government shutdown and the unpredictability of both tax refunds and tariffs caused a moderation in economic activity and consumer spending, though not an outright decline. The tone of data for February and March was positive, however, and the substantially improved numbers should counter some of the concerns regarding any impending acute deterioration in the U.S. economy.

In fact, the outlook for the U.S. economy has improved. The Conference Board’s Leading Economic Index rose 0.4 percent in March, the largest gain since last September. The index’s increase — driven by declining initial unemployment claims, rising consumer expectations for business conditions and gains in financial components — suggests that the economy is poised for gains in the months ahead. Meanwhile, upbeat data in retail sales, new home sales and international trade point to faster-than-anticipated real gross domestic product growth in the first quarter.

Consumers were busy in March after fluctuations in January and February. Total retail sales — including auto dealers, gas stations and restaurants — were up 1.6 percent seasonally adjusted from February and up 3.6 unadjusted year-over-year. Sales were up in nearly every retail sector on a month-to-month basis. New home sales increased by 4.5 percent in March, to a 692,000-unit annual rate. That was the strongest monthly sales rate since November 2017 and a positive though tentative sign of stronger housing demand. The trade deficit narrowed to $49.4 billion in February from $51.1 billion as exports continued to grow strongly while imports increased only modestly. The substantial improvement in the trade deficit reduced the drag on first-quarter GDP growth. Those developments pointed to faster-than-anticipated growth, and first-quarter GDP grew 3.2 percent, according to preliminary numbers released April 26.

Consumer outlook remains healthy and spending looks steady. Although the preliminary University of Michigan consumer sentiment survey for April reported a modest decline, sentiment has pivoted up over the last three months and remains relatively steady, supporting the view of solid consumer fundamentals. Underlying consumer fundamentals including job and wage growth and healthy household balance sheets should support retail spending and housing formation.

As we move forward into late spring and early summer, many experts will take a keen look at what is happening in the housing market as it relates to the strength of the consumer. It is not surprising that media headlines are focused on what is happening in the housing market. The interplay between housing and the economy is crucial since both depend on the strength of growth in employment and income. Whether it’s a new home or existing home, each time a home is purchased, consumers arrange financing, undertake renovations and/or make investments to improve their comfort or home values. That helps generate new sales of appliances, home furnishings, garden equipment and more.

While new home sales are up, don’t look for the overall housing industry to surge. Existing home sales in March were weaker than expected. After rebounding in February by a revised 11.2 percent, existing home sales fell 4.9 percent in March. Averaging 5.2 million units for the first three months of 2019, existing home sales are muted but not weak. Home price gains in excess of income growth over past years adversely affected consumer demand by eroding housing affordability while higher mortgage rates reduced affordability even further. Nonetheless, fundamentals for housing are strengthening as jobs and wages have grown faster. The recent pullback in mortgage rates may induce modest tailwinds and support household formation and home building and sales.

Tax season is over for most us, but it is too soon to determine the full effect on consumer spending. Tax refunds and payments impact the timing of spending by households. Nobody, not even the IRS, had the ability to know if refunds or payments were to be larger or smaller compared with last year. The IRS attempted to set withholding rates to minimize payments and refunds. The government shutdown likely delayed data collection and therefore the timing of refunds and spending. Many taxpayers received their tax cut in the form of higher paychecks throughout 2018, which partially explains why the average refund as of April 19 — $2,863 — was 2.7 percent lower than 2018. NRF’s annual survey showed that plans for the refunds included savings and paying down debt as a priority, as usual. On the other hand, households who under-withheld faced higher payments, which can reduce household spending.

Download this month’s report, which includes the following charts and highlights:

  • Consumer sentiment
  • Employment
  • Job openings and hires
  • Consumer price index (CPI)
  • Wages and salaries
  • Credit
  • Housing
  • Leading economic index

Past issues

NRF chief economist says pandemic recession could already be easing but 'no one has a crystal ball'
July 1, 2020
Monthly Economic Review: July 2020
July 1, 2020
NRF chief economist says 'uncertainty abounds' in predicting recovery from coronavirus pandemic
June 1, 2020