Retail Sales and Consumer Prices Show Real Life

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Retail sales rose 0.4 percent last month following a much bigger gain in December than originally reported, the government said Wednesday. Economists polled had forecast a 0.2 percent increase. Retail sales are now up more than 5 percent annually, approaching more normal spending. December spending was also revised upward to 1 percent from an already strong 0.6 percent.

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Graph: Econoday

And gas prices are rising along with consumer spending, which is boosting retail prices. The headline year-on-year Consumer Price Index, reflecting easy energy comparisons with 2016, is moving higher, well above the Fed’s general 2 percent target at 2.5 percent. This is up 4 tenths in the month and is the highest in nearly 5 years. The core rate is also up, at a year-on-year 2.3 percent for a 1 tenth gain.

This shows an economy returning to a more normal 3 percent GDP growth rate, as well. The question now is what does this mean for jobs and the workers to fill them, as we are already near full employment.

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Graph: Econoday

Every major retail sector reported higher sales except for auto dealers, whose business tends to tail off after the Christmas shopping season. Auto purchases account for about one-fifth of all retail spending. And if autos and gasoline are excluded U.S. retail sales rose a robust 0.7 percent, the Commerce Department said.

Outlets such as Best Buy that sell electronics and appliances saw a 1.6 percent rise in sales, the largest gain in a year and a half. Stores that sell clothing and sporting goods also posted sales gains of 1 percent or more. Even department stores, whose sales fell sharply in 2016, got into the act. Department-store receipts surged 1.2 percent in January to mark the biggest increase in more than a year.

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Graph: NFIB

One clue to where additional jobs may come is the National Federation of Independent Business survey for small businesses, which account for more than 60 percent of the hires these days. And their confidence has soared since Donald Trump’s election with his promise of lower taxes and regulations.

A majority of small business owners are making no secret of their love for freer markets. “The continued surge in optimism is a welcome sign that economic growth is coming, said NFIB Chief Economist Bill Dunkelberg. “The very positive expectations that we see in our data have already begun translating into hiring and spending in the small business sector.” 

Job openings and job creation plans both posted small gains, pushing the NFIB Jobs Report into a strong, positive direction. Dunkelberg, as well said the data could signal higher GDP growth in 2017. 

The recent growth in optimism looks similar to the surge in the Index in 1983, which was followed by years of economic prosperity, said the NFIB. After eight years of struggling with government barriers, small business owners are hopeful that policy proposals from the new administration and Congress will spur economic growth in a similar manner, said NFIB President and CEO Juanita Duggan.

However, one still uncertain factor is the direction of interest rates. Both mortgage rates and Treasury yields are still at historic lows, but how long will that last with faster growth?

Fed Chair Janet Yellen surprised markets with her congressional testimony yesterday when she told lawmakers that waiting too long to raise interest rates would be “unwise.” This comment, along with assurances that the Fed will raise rates at one of its coming meetings, inspired a sharp selloff in Treasury securities. Bond yields rise as prices fall.

The yield on the 10-year Treasury note rose five basis points to 2.52 percent today, while the yield on the two-year note gained 3.3 basis points to 1.27 percent. The yield on the 30-year Treasury bond rose 4.8 basis points to 3.10 percent. But these rates are still at historical lows, and would have to rise another 1 to 2 percent to accommodate inflation rates that have historically accompanied higher growth rates.

Harlan Green © 2017

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

About populareconomicsblog

Harlan Green is editor/publisher of PopularEconomics.com, and content provider of 3 weekly columns to various blogs--Popular Economics Weekly and The Huffington Post
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