Americans Kept Shopping In April. Maybe That’s Bad

US retail sales were solid in April, closely watched data out Tuesday suggested.

The headline print showed a 0.9% gain (figure below), essentially in line with estimates and certainly better than many feared considering the growing chorus of recession warnings.

The range of estimates from nearly six-dozen economists was 0.4% to 2%.

Prior months’ figures were revised notably higher, but that doesn’t much matter considering we already know how the broader economy fared during the first quarter.

April’s ex-autos print, a 0.6% MoM gain, handily topped estimates, as did the control group. That bodes well for GDP.

These numbers matter. This is a critical juncture for the US consumer. The preliminary read on University of Michigan sentiment for May was bleak and Goldman cut their forecast for the US economy in Q2 citing the prospect of “consumer caution.”

Soaring prices for gas and food are chipping away at disposable incomes, and wage increases aren’t keeping up with inflation. It’s the same story month after month. Pump prices hit a new record high (in nominal terms) last week, and April’s CPI data showed  food prices rose a 17th consecutive month.

In that context, the upbeat read on retail sales was a welcome development. Tuesday’s figures represented “a solid initial trajectory for consumption in Q2,” BMO’s Ian Lyngen remarked.

Spending at food services and drinking places, the only services category included in the data, rose 2%.

That said, the figures were further evidence to support the contention that the economy can handle aggressive Fed hikes to battle inflation. By now, it’s obvious that elevated prices are both a supply and a demand issue. Demand remains robust and until it cools, supply will have a difficult time catching up.

“The US retail sales report for April is very solid and points to a willingness amongst households to run down accumulated savings to maintain lifestyles at a time when inflation is hurting real income growth,” ING wrote. “It fully backs the case for a sharp recovery in GDP growth in Q2 and a series of 50bps rate hikes from the Fed.”

I hesitate to mention this because, frankly, I’ve become wholly disenchanted with his musings, but Zoltan Pozsar suggested late last week that strong household balance sheets are actually a bad thing. “Strong balance sheets are a ‘cyclical bad,’ not a ‘cyclical good,'” he wrote. “It means more discipline from the Fed. More hikes and more volatility injected by the Fed — by design — until financial conditions tighten more and demand slows enough.”

Pozsar continued: “Consider the idea that strong private balance sheets raise the risk of a recession, for they may force the Fed’s hand to shock risk assets more to make sure we get a recession, or at least a very hard landing, so that the Fed can slow down inflation enough.”