Consumers Would Put Fed Hike on Map If Not for Jobs Data

American consumers weren’t letting a slowdown in hiring prevent them from going on a shopping spree.

Retail sales increased by a more-than-forecast 0.5 percent in May following a 1.3 percent jump the prior month that was the biggest gain in a year, Commerce Department figures showed Tuesday in Washington. The advance was broad-based, with online merchants and clothing stores leading the way.

Consumer spending, which accounts for almost 70 percent of the economy, is now poised to propel a rebound in economic growth this quarter after a slowdown at the start of the year. If not for spectacularly weak employment data last month, and the possibility that the U.K. may leave the European Union, Federal Reserve policy makers meeting Tuesday and Wednesday would probably be more inclined to raise interest rates for a second time.

Had it not been for the weak payroll numbers last month, the solid retail sales data and evidence inflation is picking up would mean “we’d be having a much different conversation about the Fed heading into the decision,” said Drew Matus, deputy U.S. chief economist at UBS Securities LLC in New York. The rate-setting Federal Open Market Committee is scheduled to release its policy statement at 2:00 p.m. on Wednesday.

Retail sales have posted their best back-to-back monthly gains in more than two years, with demand rising across the board in May. Nine of 13 major categories showed sales gains from the prior month, led by a 1.3 percent jump at non-store retailers, which include online merchants. Sales also rose 1.3 percent at sporting goods stores and 0.8 percent at clothing stores, which posted their biggest gain since November.

Economists have said stronger household spending will need to lead a second-quarter rebound in growth, and several boosted their tracking estimates for consumption after the report.

Analysts at Barclays Plc now see household spending climbing at a 3.7 percent annualized rate, up from the 3.4 percent they expected before the report. Meanwhile economists at Credit Suisse raised their estimate to a 3.6 percent pace from 3.2 percent.

Either would represent a marked acceleration in consumption from the first three months of the year, when spending climbed at a 1.9 percent rate. The expected pickup in spending will propel gross domestic product up by a 2.5 percent annualized rate from April through June following a 0.8 percent advance in the first quarter, according to a Bloomberg survey of economists earlier this month.

Yellen’s View

That’s the type of rebound that Fed Chair Janet Yellen was probably anticipating when she said in late May that another interest rate increase was probably in the cards in coming months. Then came the jobs report, which showed payrolls climbed by just 38,000 workers in May, the least in more than five years, while the jobless rate dropped to an almost nine-year low as hundreds of thousands of people left the workforce.

Such a reversal in what had been one of the strongest aspects of the economy was enough to turn officials cautious about the economic outlook. In a speech in Philadelphia earlier this month, Yellen didn’t address the timing of the Fed’s next interest-rate increase, an omission viewed as a signal that a June move was off the table. She called the May jobs report “concerning” but cautioned against placing too much significance on a single report.

Investors have assigned no chance of a hike by the Fed at this week’s meeting, according to data compiled by Bloomberg. 

In addition to the jobs data, Fed officials may also be reluctant to raise rates in the face of polls showing that support for Britain’s leaving the EU was gaining traction ahead of the vote next week. The fallout from such an exit could damp odds for July as well, which currently stand at about 16 percent.

More Data

Central bankers will want to see more data to clarify the status of the labor-market recovery, Matus said. The spending gains may make more sense after factoring in the fact that firings remain at historically low levels.

“No one’s getting laid off, so if you have a job, you’re probably reasonably confident you’re going to be able to keep it,” Matus said. “That means that most consumers feel reasonably confident that they can go out and spend some money. If the labor market were weakening substantially, I don’t think consumers would feel that way.”

Meanwhile a separate report from the Labor Department on Tuesday showed inflation pressures are building. The costs of goods imported into the U.S. climbed 1.4 percent in May, the biggest gain in four years.

A pickup in inflation has long been a missing link for the Fed, which has a dual mandate of stable prices and maximum employment. Inflation hasn’t reached central bankers’ 2 percent target since April 2012, even as the labor market has continued to strengthen.

Now it seems as if the tables may be turning.

To contact the reporters on this story: Victoria Stilwell in Washington at vstilwell1@bloomberg.net, Carlos Torres in Washington at ctorres2@bloomberg.net. To contact the editors responsible for this story: Carlos Torres at ctorres2@bloomberg.net, Alister Bull