Washington stumbles, but businesses and consumers stay on course

Arriving together on Friday, reports on April retail sales, inflation and consumer sentiment portray a U.S. economy that continues to grow steadily and at a manageable pace.
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Arriving together on Friday, reports on April retail sales, inflation and consumer sentiment portray a U.S. economy that continues to grow steadily and at a manageable pace.

Despite the continuing political paralysis in Washington — reflected again by the latest reading from the University of Michigan’s Consumer Sentiment Index — businesses and consumers remain confident about spending money and making financial commitments for the future.

The sentiment index rose to 97.7 in mid-May from 97.0 at the end of April and from 94.7 in May 2016.

“Consumer sentiment remained on the high plateau established following [Donald] Trump's election, with the early May figure nearly identical with the December-to-May average of 97.4,” Richard Curtin, chief economist of the university’s Surveys of Consumers, said in a statement.

Curtin said the partisan political divide that repeatedly shows up in the twice-monthly survey has narrowed slightly, “mainly due to Democrats expressing diminished fears of an immediate recession and lessened concerns about personal financial setbacks.”

“The recent stability in consumer sentiment, however, masks two important underlying shifts in the components, as well as in the partisan divide,” Curtin added.

“More favorable income gains and low inflation meant that consumers held the most favorable real income expectations in a dozen years. Buying plans, however, were mixed: Household durables rose to a decade peak, while vehicle-buying conditions slipped to a three-year low. Home-buying conditions were viewed less favorably, but were offset by the most favorable views about home selling in more than a decade.”

The Commerce Department said retail sales rose 0.4 percent in April and the department revised its March report to say sales rose 0.1 percent instead of declining.

Excluding automobiles, gasoline, building materials and food services, retail sales gained 0.2 percent after advancing 0.7 percent in March.

Reuters said those so-called core retail sales correspond most closely with the consumer spending component of gross domestic product. Overall, the government reported gains in nine of 13 major sales categories.

Separately the Labor Department said the Consumer Price Index rose 0.2 percent in April after falling 0.3 percent in March. The so-called core CPI, which excludes volatile food and energy costs, rose just 0.1 percent, which was less than economists expected. Core prices rose 1.9 percent on a year-over-year basis.

"The economy picked it up a notch from the slow start earlier this year, but the inflation fires are not burning brightly and this will likely keep the Fed on just a gradual pace for interest-rate hikes later this year," Chris Rupkey, chief economist at MUFG Union Bank in New York, told Reuters.

Bloomberg said the data on retail sales and inflation showed that the United States is poised for steady growth.

“It’s a pretty decent overall picture of the U.S. economy,” Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, told Bloomberg. “Consumer spending is rebounding, though possibly not as much as we expected. On the inflation front, there’s not a lot of pricing pressure, and it looks like inflation is gravitating toward the Fed’s goal.”

Earlier last week a gauge of small-business sentiment slipped for the third month in a row in April, although the NFIB Index of Small Business Optimism posted a historically high reading of 104.5. The index has been above 104 for the past five months, the period since Trump’s election. The all-time high is 107.7, set in 1983.

The index declined 0.2 points from March largely because business owners were upset that Congress has not repealed and replaced the Affordable Care Act. Nearly all of the drop was attributable to the component of the index that reflects expected business conditions.

“Small business owners were measurably shaken when Congress failed to address one of their most important concerns,” NFIB president and CEO Juanita Duggan said in a statement. “Obamacare has crushed small businesses. Small business owners expected the White House and Congress to address that problem. Their failure to do so caused volatility in the Optimism Index.”

“Congress and the White House must understand that small business owners are paying close attention, and they are making decisions that affect the economy based on how Washington performs,” Duggan added. “The drop in expected business conditions should be a warning to Washington that health care reform, regulatory reform and tax reform have implications far bigger than politics.”

This week’s calendar is relatively light. Today economy watchers will see April data on housing starts, building permits and industrial production.

On Friday The Conference Board will release its Leading Economic Index, also for April. The index showed steady growth in January (0.6 percent), February (0.5 percent) and March (0.4 percent), and a similar reading for April would reinforce the views of economists who believe the economy will continue on the path of moderate growth.

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