U.S. Consumers Are Almost Too Healthy

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Retail sales figures were upbeat, but their reliance on goods versus services might be masking a level of spending that is stronger than what makes the Fed comfortable

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It counted as solid even with the context of what is happening with inflation, with sales last month rising at a faster clip than the 0.3% increase in overall consumer prices in April from March that the Labor Department reported last week. Additionally, retailers are mostly in the business of selling goods, with sales at restaurants, bars and other food and drinking places the only major services category included in Tuesday’s report. And goods prices, while up a lot from a year earlier, actually slipped a bit in April from March.

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The goods-centric nature of the retail sales report also means investors need to be cautious in how they interpret it. Since the pandemic started, US households have devoted much more of their spending toward tangible things than before—a result of both the increased demand for goods the Covid-19 crisis provoked and the much-higher inflation goods experienced versus services. In the first quarter, spending on goods accounted for about 35% of household spending, up from 31% in the fourth quarter of 2019. To bring goods and services spending back into their previous balance, goods sales would need to fall by about 11% and services sales would need to increase by about 6%.

Of course nobody knows what the eventual goods-versus-services spending equilibrium will be, but it seems likely the services share will be heading higher. People are re-engaging with activities they cut back on during the pandemic, such as travel, while demand for items such as furniture might be relatively sated. Moreover, higher goods prices might make services more attractive.

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The steady increase in spending at food services and drinking places shown in Tuesday’s report—it was up 2% from March and up 19.8% from a year earlier—might be instructive for where services spending is heading. Away from restaurants and bars, sales were up a more muted 6.7% on the year.

Tuesday’s report was taken on Wall Street as a sign that despite concerns over inflation and the Federal Reserve’s effort to slow the economy, the consumers are alive and kicking. They might be propelling the economy way past the Fed’s goal posts.

Write to Justin Lahart at [email protected]

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Credit: www.Businesshala.com /

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