The retail sales finally rebounded in March, after disappointing declines in the last three months. However, this growth was below expectations. So how does one interpret the recent data on U.S. retail sales and what do they mean for the gold market?

Retail sales in March increased 0.9 percent, after dropping 0.5 percent in February, which may confirm opinions about harsh winter, preventing consumers from shopping. However, the Commerce Department data published on Tuesday were below expectations. The market consensus for March was for a 1.1 percent boost. Therefore, the rebound can be interpreted as rather soft and disappointing. Weaker than expected retail sales explain, perhaps, why the greenback tumbled on Tuesday, after five straight days of gains.

Indeed, job gains, wealth accumulation, low gas prices and very high consumer sentiment should encourage more solid consumer spending, unless the economic situation is not as rosy as it is commonly believed (for example, due to inaccurate data on the labor market). According to Ian Shepherdson at Pantheon Macro, the level of spending was about 1-1/4% lower in March than would have been the case if sales had continued to rise at their prior trend pace through the winter.

Moreover, it is worth pointing out that retail sales rebounded on the back of strong auto sales (they jumped 2.7 percent, so excluding autos, retail sales were up only 0.4 percent), fueled by soaring auto loans. Therefore, the foundations of rising sales are not necessarily sound and may cause another subprime crisis.

Why are retail sales still so weak? The reason is probably consumer deleveraging. Households are paying off their debts, therefore without an increase in the household leverage ratio, retail sales are not boosting. Consumers can increase their spending either thanks to debt or higher wages and salaries. Therefore, the household deleveraging and sluggish wage growth explain why retail sales growth was so tepid.

Thus, without an improvement in wages and productivity consumer spending would not rise. And there was some evidence out yesterday and today that the supply side of the economy is not in good shape. We will describe it in a more detailed way in the following editions of the Gold News Monitor, however it is worth signaling that total business sales were essentially flat and inventories at U.S. businesses rose 0.3 percent in February, while the Empire State Manufacturing Index moved sharply lower in April, falling to negative 1.2 from 6.9 in March, the National Federation of Independent Businesses Small Business Optimism Index fell 2.8 points to 95.2, the worst reading since June, and industrial output sputtered in March, leading to the first quarterly decline in production since the recession.

The key takeaway is that U.S. retail sales rose in February, however the scale of the increase was soft and disappointing. Consumer spending will not rise until an increase in household leverage or wages and salaries materializes. The incoming data suggests that we cannot expect quick improvement in the U.S. economy, which is basically good news for gold bugs. Although U.S. retail sales increased, they will not likely to be positive enough for the doves at the Fed.

Thank you.

Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor

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