The breakdown of trade talks between the U.S. and China and the prospect of yet more tariffs did not deter shoppers from opening their wallets last month, but economists warn that could soon change.
New figures from the Commerce Department showed that excluding volatile items such as autos and gasoline, retail sales ticked up by an impressive 0.5 percent in May.
What’s more, when added to April and March’s upwardly revised numbers, sales over the past three months were 8.5 percent higher, marking the fastest pace of growth in 16 years and fueling hopes that consumer spending would boost second-quarter growth.
“Today’s retail numbers, and upward revisions to prior months, reinforce the ongoing strength of the consumer and are consistent with a pick up in the pace of the economy in the coming months,” said National Retail Federation chief economic Jack Kleinhenz, citing a strong job market and recent income gains.
It may not be all smooth sailing for the rest of the year.
That’s because Kleinhenz warned that if the U.S. does pull the trigger on placing 25 percent tariffs on almost every single Chinese import, the strong spending pattern could slide into reverse.
“An escalation in trade tariffs will undoubtedly create a considerable downdraft to confidence and spending, or lead to a pullback in spending,” he added.
His words chimed in with recent comments from a number of major U.S. brands, including Ralph Lauren, Steve Madden and Forever 21, who all warned that tariffs on Chinese imports of apparel and footwear would lead to higher prices for consumers, job losses and possible store closures.
And while the spending figures are yet to be dented, there were some tentative signs Friday that the trade issues were beginning to weigh on confidence.
The University of Michigan’s consumer sentiment index slipped slightly by around 2 points to 97.9, almost reversing May’s gain, while the current expectations sub-index fell more sharply to 88.6 from 93.5.
It appeared that tariffs were partly to blame as negative mentions of levies were spontaneously made by 40 percent of all consumers in early June, up from 21 percent in May and the prior high of 35 percent in July 2018.
While some of the decline was due to expected tariffs on Mexican imports, which may be reversed in late June, most of the concern was with the 25 percent tariffs on nearly half of all Chinese imports.
“The small decline in the University of Michigan consumer confidence index this month masked a larger drop back in consumers’ expectations, suggesting that the trade war is beginning to take a heavier toll on sentiment,” Michael Pearce, senior U.S. economist at economics consultancy Capital Economics, said, adding that this, alongside a number of other factors, could lead the Fed to cut interest rates later this year.
“That’s not enough to justify the Fed cutting rates within the next month or two, but with consumers’ inflation expectations also falling back, the case for interest rate cuts later this year is still strengthening,” he said.
The Fed raised rates four times last year and has faced criticism from President Donald Trump for moving too quickly.
President Donald Trump tweeted that the strong greenback against a raft of currencies is hurting the U.S. economy and in doing so, singled out the independent Federal Reserve for raising interest rates too quickly.