A sharp drop in auto sales will likely drag down the overall increase in retail sales, but other sectors are likely to show strong gains.
This March is the warmest on record, and this unseasonably pleasant weather boosted sales in most other categories. People would likely have spent more money on clothes and accessories, at restaurants and on home-improvement projects, and a little ahead of schedule. The new Apple iPad, which was also released in March, significantly boosted electronics and e-commerce sales.
But the weather impacted motor vehicle sales a little differently. People were buying the cars they might have bought in March a little ahead of time, driving February unit sales numbers up and March numbers down.
Carmakers sold more than 15 million vehicles, when annualized, in February, an unusually high number. For March, this number had fallen to 14.3 million, lower than what economists had predicted. This sharp decline is nothing to worry about, said Bill Jordan, economist at Wrightson ICAP, as it is not a new “trend towards deceleration, but a one-month aberration.”
Pent-up demand and the aging fleet will likely give the auto unit sales number a slight boost from April onwards, averaging at a very respectable 14.5 million, annualized, said Jordan.
However, it will affect the overall retail sales number in March, and make it look a little more disappointing than it is.
“In terms of the growth rate between February and March, that should keep the headline retail sales from doing so well—probably a 0.2% increase,” said Chris Christopher, economist at HIS Global Insight. “If you take the autos out, we think that the increase in March will be anywhere between 0.6% to 0.7%.”
Despite a soft labor market and mild income growth in March, consumers still went out more and spent money on discretionary items. Consumer confidence reached a one-year peak towards the end of March, and this will likely be reflected in the general merchandise, building material, restaurants and bars categories in retail sales report for March.
“Garden supply and building material stores such as Lowe’s or Home Depot should have pretty good sales,” said Christopher. “Because when you have warmer weather, especially in the northeast, then people will go out and get all their home improvement needs done a little ahead of schedule.”
“In addition, clothing should do well. Because when you have warmer weather people will go out and buy the summer or the spring line of clothing a little ahead of time.”
Gasoline prices are still on the rise, but the increase isn’t as sharp as was at the same time last year. But a disruption in the supply, perhaps due to geo-political unrest in Iran, or increased global demand might still cause oil and gas prices to skyrocket, which would have an adverse effect on the economy.
“Higher gas prices might raise retail sales in the near term, but that will have a crowding out effect over a slightly longer horizon,” said Sean Incremona, economist at 4Cast Ltd.
But gas prices will only hold down spending in other sectors if price nears the $5/gallon mark, he said. And this is an unlikely scenario.
“It seems like most of the increases right now are going to be temporary,” Incremona said.
After a lackluster job report in which only 120,000 jobs were added in March—half of what economists had predicted, there’s some worry that the improvement in the labor market could peter out and income growth could stall. This would have a depressing effect on sales in the future, said Jordan.
“It’s not our projection, but that’s the main worry,” he said.
But these concerns will have little effect on the March retail sales number, which is likely to be stable, almost “run-off-the-mill,” said Jordan.
“It’s not very weak, it’s not very strong,” he said. “Nothing spectacular, but decent.”