Retail Sales Up In May: Is A Future Rate Hike Likely?

An anemic job report in May had raised questions about whether the economy was losing steam but it seems we finally have an answer. Retail sales rose steadily in May, as people went on to buy automobiles and a range of other goods despite an increase in gasoline prices, clearly indicating that the economy is gathering pace. This has set the stage right for policy makers to go for a rate hike, if not today, then probably in the near term. 

Retail Sales Up: A Favorable Sign for the Economy

The Commerce Department unveiled that retail sales advanced 0.5% in May to $455.6 billion, faring better than analysts’ expectations of a 0.3% rise and followed a robust increase of 1.3% recorded in April. Excluding automobiles, gasoline, building materials and food services, retail sales were up 0.4% last month. Auto sales inched up 0.5%, while receipts at gasoline stations grew 2.1%. Online retail sales jumped 1.3% in May.

The abovementioned data strongly suggests that consumer spending, which accounts for over two-thirds of U.S. economic activity, is improving. Consumer spending rose 1% in April, up significantly from a flat reading in March and a 0.2% jump in February. Strong consumer spending and an increase in retail sales is a sheer reflection of the economy gaining momentum which had nearly stalled in the beginning of the year, with a tepid 0.8% growth in the first quarter.

Does This Pave the Way for a Future Rate Hike?

Market experts remained cautiously optimistic about acceleration in economic growth in the second quarter. On the one hand, they are citing that consumers are likely to spend more, supported by rising income, an improving job market and gains in house price. Again, they are not ignoring the fact that consumer confidence dampened somewhat last month. Moreover, global economic headwinds such as yet-to-recover Chinese economy, fears of a Brexit and fluctuating commodity prices have been playing spoilsport.

Well, the Federal Reserve has been surely keeping a close watch on the ongoing economic activities and will arrive at a decision only after taking into account all the relevant factors. Last year in December, the Federal Reserve raised interest rates for the first time in almost a decade to a range of 0.25%−0.5%, and currently the market is bracing for another quarter-point increase. Industry analysts predict that encouraging economic data might reflect in an interest rate hike – a step toward “normalizing monetary policy” sometime in July.

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