By Orbex

The US retail sales report due today will mark the end of a busy week ahead of the Fed meeting next week. Economists forecast that retail sales will bounce back following the decline in April.

Headline retail sales are forecast to rise 0.6% on the month, reversing the 0.2% decline from April. Excluding autos, retail sales are tipped to rise 0.3% in May, up from the 0.1% increase in April.

The monthly data puts the headline retail sales at 3.1% in April, lower from 3.8% in the previous month.

The slump in April came amid a strong surge in retail spending in March. But following this, the retail sales report for May is expected to see a slower rebound.

The retail sales report gains attention as the monthly jobs report over the past two months has been somewhat subdued. The average pace of hiring has fallen dramatically while wage growth has been stuck near the 3.1% – 3.2% level over the past few months.

But at the same time, the weaker pace of inflation growth means that wages continue to outstrip inflation growth, leaving more spending power in the hands of consumers. Consumers are also likely to see the fact that the Fed won’t be hiking rates any longer. This could translate to an increase in spending at retail outlets.

Various forward-looking surveys point to the likelihood of an increase in retail sales. The Conference Board’s consumer confidence report showed an increase to 134.1 in May. Various other measures including present conditions increased during the month.

This potentially underlines the view that retail sales would pick up moderately after the dip in April.

Why Did Retail Sales Fall in April?

The decline in the retail sales for April came about as consumers cut back on spending on a variety of items. The Commerce Department’s data showed that retail sales dropped alongside a slump in car sales.

Car sales declined 1.1% on the month while sales of electronics and appliances fell 1.3%. The decline was a bit puzzling as it came following a strong report in February. Data over the past few months has been erratic at the very least.

The data, however, shows the underlying uncertainty among consumers. The retail sales report for May will see a potential influence on the second quarter GDP. The US GDP was seen rising at a revised pace of 3.1% in the first quarter.

But various headwinds could start to see the gross domestic product taking a hit in the second quarter.

The pace of job growth was steady in April with wages holding up amid inflation staying close to the 2.0% inflation target rate set by the Fed. The weakness in retail sales for April was rather widespread, making it even more confusing.

Sales at clothing stores fell 0.2% while garden and home supply sales dropped 1.9%. Online retail sales also declined.

This could potentially change in the month of May as economists expect to see gains during the month. An uptick in the retail sales, however, will be overlooked. Investors will be looking to see the average pace of gains in retail spending.

Implications of the Retail Sales Report

Today’s retail sales report will no doubt influence the second quarter GDP figures. The median estimates currently point to a 1.7% increase in the gross domestic product. This could further take a hit in the event that retail sales slump further.

While the market reaction will be muted to a solid print, it is unlikely to move the markets much. Following a busy week that has seen the producer prices and consumer price index data, investors will be looking to see what the Fed will do next week.

Given that the expectations for a slower pace of GDP growth is already priced in, the impact of today’s retail sales report could be limited.

By Orbex