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Retail trade report reinforces case for weaker real PCE growth in Q1

Published on March 14, 2024

Gerard MacDonell

The retail trade report was weaker than expected, as core sales growth missed on the month and prior months were revised somewhat downward in level terms. Specifically, core retail sales growth in February was 20 bps lower than expected, and the level missed by 80 basis points because of the revisions. This is not major news, particularly relative to the volatility in retail sales we have seen recently. But along with the slightly lower print in the auto SAAR and a base effect, it does suggest that real PCE growth is tracking at around trend or just marginally below for the first quarter.

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Description automatically generated with medium confidence — *Source: Federal Reserve Bank of St. Louis (FRED), Bloomberg for consensus, FH calculations*
*Data are actual to February. Thin black lines who data before revision with the screen consensus growth rate appended for February.*

The level of real spending in December, which affects the launch, is set to be revised down by 10 bps (in level terms), while the January figure comes down 20 bps in level terms. February real PCE is set to rise, 10 to 20 bps, primarily because of presumed momentum in the (mostly) services components that are not informed by the retail trade report or the auto SAAR. Assuming further a 2% (ar) gain in March, would leave real PCE growth for Q1 at 1.5% (ar), vs the 2.8% gain currently reported for Q4. There are base and auto vol effects there, as the underlying still appears to be above 2% growth. This was largely expected to develop at some point, but similar pure extrapolations of recent history that we might have put together a couple months ago looked about a percentage point stronger. (I try to keep the forecast separate from what the trends themselves say.)

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Description automatically generated — *Source: BEA, NBER, FH calculations and estimates*
*Data are actual to January inclusive of estimated revisions and estimated for February.*

The focus in rates this morning is apparently more on the PPI. But I have less to add on that until I see how it affects the bean counts for the core PCE deflator and its own underlying “cores.”

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