US retail sales increased more than expected in March amid a surge in receipts at online retailers, further evidence that the economy ended the first quarter on solid ground.
The report from the Commerce Department yesterday, which followed news this month of robust employment gains in March and a pick-up in consumer inflation, bolstered expectations that the Federal Reserve could delay cutting interest rates until September. Some economists see the window for lowering rates this year closing.
Strong retail sales prompted economists at Goldman Sachs to boost their gross domestic product (GDP) growth estimate for the first quarter to a 3.1 per cent annualised rate from a 2.5pc pace. The economy grew at a 3.4pc rate in the fourth quarter.
“The stronger economic activity remains, the slower inflation declines and the later the Fed responds with rate cuts,” said Kathy Bostjancic, chief economist at Nationwide. “The lack of moderation in consumer spending and inflation ... could push off rate reductions to next year.”
Retail sales rose 0.7pc last month, the Commerce Department’s Census Bureau said. Data for February was revised higher to show sales rebounding 0.9pc, which was the largest gain in just over a year, instead of the previously reported 0.6pc.
Economists polled by Reuters had forecast retail sales, which are mostly goods and are not adjusted for inflation, would rise 0.3pc. Sales jumped 4.0pc on a year-on-year basis in March.
Despite higher inflation and borrowing costs, spending is continuing to hold up, confounding predictions of distress among lower-income households, thanks to the resilient labor market.
The latest Bank of America credit card data showed lower-income spending continues to outpace higher-income spending.
“An important reason is that, although lower-income consumers have been disproportionately affected by inflation, they have also been the biggest beneficiaries of the robust labor market,” economists at Bank of America Securities wrote in a note. “Lower-income workers have seen the largest cumulative wage gains since the start of the pandemic.”
Job gains averaged 276,000 per month in the first quarter, compared to 212,000 in the October-December period. Wage growth remains above 4.0pc on a year-on-year basis.
Financial markets and most economists have pushed back their expectations for the first rate cut to September from June, and anticipate two rate cuts instead of the three envisaged by policymakers. A few economists believe the U.S. central bank could still initiate its easing cycle in either June or July.
The Fed has kept its policy rate in the 5.25pc-5.50pc range since July. It has raised the benchmark overnight interest rate by 525 basis points since March 2022.
“A June cut is not out of the question, but the balance of risks is tilting toward the first rate cut coming later in the year,” said Michael Pearce, deputy chief US economist at Oxford Economics.
Stocks on Wall Street were trading largely higher, with investors keeping a wary eye on the Middle East. The dollar rose against a basket of currencies. Prices of US Treasuries fell, with the yield on the benchmark 10-year note hitting a five-month high.