According to the Bank of America, aggregate credit and debit card spending increased 13 percent on a year-on-year basis in April. The bank noted that while inflation was leading to higher spending, it was “clear consumer strength goes beyond this.” Consumer price inflation increased 8.3 percent on a year-on-year basis in April.
A tight labour market is generating strong wages and allowing cash-squeezed consumers to take a second job or pick up extra shifts, providing some cushion against inflation. Households are sitting on at least $2 trillion in excess savings, some of which are being deployed to maintain spending.
But with the Federal Reserve adopting an aggressive monetary policy stance to cool demand and curb inflation, retail sales are expected to slow later this year. The US central bank has raised its policy interest rate by 75 basis points since March. The Fed is expected to hike that rate by half a percentage point at each of its next policy meetings in June and July.
Excluding automobiles, gasoline, building materials and food services, retail sales increased 1.0 percent in April. Data for March was also revised higher to show these so-called core retail sales increasing 1.1 percent instead of dipping 0.1 percent as previously reported.
Core retail sales correspond most closely with the consumer spending component of gross domestic product. Last month’s solid rise in core retail sales suggests that consumer spending got off to a strong start in the second quarter.
Strong consumer spending and robust business investment in equipment helped to underpin domestic demand in the first quarter even as GDP contracted at a 1.4 percent annualised rate because of a record trade deficit and a slight moderation in the pace of inventory accumulation relative to the October-December period.
A separate report from the Fed on Tuesday showed manufacturing output increased 0.8 percent last month, matching the gain in March. Economists had forecast factory production would rise 0.4 percent. Output jumped 5.8 percent compared to April 2021.
Production at auto plants increased 3.9 percent last month after accelerating 8.3 percent in March. Most durable goods industries posted gains, with only nonmetallic mineral products, electrical equipment, appliances and components, and furniture and related products recording losses.
April’s rise in manufacturing output combined with a 1.6 percent increase in mining to lift industrial production 1.1 percent. That followed a 0.9 percent advance in March.
Production at mines is being boosted by higher crude oil prices, which have driven the cost of gasoline to record highs. Utilities production rebounded 2.4 percent after dipping 0.3 percent in March.
Capacity utilisation for the manufacturing sector, a measure of how fully firms are using their resources, increased 0.6 percentage point to 79.2 percent in April. That was the highest level since April 2007 and raised capacity utilisation 1.1 percentage points above its long-run average.
Officials at the Fed tend to look at capacity use measures for signals of how much “slack” remains in the economy — how far growth has room to run before it becomes inflationary.