Retail sales jump 0.5 percent in May as consumers gain confidence

Retail sales shot up for the second straight month, the Commerce Department reported on Tuesday.

Mike Blake/Reuters/File
Automobiles are shown for sale at a car dealership in Carlsbad, California, U.S. (May 2, 2016).

Consumers continued their strong spring spending streak last month, and many experts expect the pickup to continue into the later part of the year despite a recent slowdown to the economy's breakneck pace of hiring gains. 

Retail sales increased for the second consecutive month in May, edging up by 0.5 percent to total $455.6 billion, the Commerce Department reported Tuesday. Economists surveyed by the Wall Street Journal had projected an 0.3 percent increase. Consumer spending accounts for approximately 70 percent of US GDP.

The strong report follows a blockbuster month in April, when retail sales increased 1.3 percent. That was the biggest monthly increase since March of last year.

Consumers are continuing make a range of purchases, from electronics to food, at a healthy pace. Sales of cars and car parts, a major investment, climbed by 0.5 percent, even as consumers paid more for gasoline. Gas prices rose by 7.5 percent in May, to $2.38 a gallon.  

Although gas is more expensive, consumers are choosing to eat out more. Restaurant sales climbed by 0.8 percent in May, the biggest gain since February.

"May’s retail sales report confirms that the American consumer is back on track despite rising pump prices and a poor showing of jobs added to the economy in May," IHS Global Insight economist Chris Christopher wrote in an emailed analysis. "The outlook for consumer spending is looking significantly stronger for the remaining three quarters of the year premised on real disposable income gains, low interest rates and oil prices, and strong finances."

In another good sign for the consumer economy, small business confidence improved last month. According to the index of The National Federation of Independent Business (NFIB), small business optimism rose to 93.8 in the May reading, after an April reading of 93.6. Twelve percent of small businesses planned to hire more people, and 23 percent reported having more capital on hand to spend, a slight decline from 25 percent in April. 

“Overall business sentiment remains somewhat depressed relative to its 2014 highs, but the last few months have seen a modest rebound. Labor market tightness remains a leading concern among small businesses and we expect this trend will remain in place for some time to come,” Jesse Hurwitz, US Economist at Barclays Capital, writes in an emailed analysis.

Consumer spending and the labor market are related, but they don't always move in lockstep. Hiring slowed to a mere 38,000 jobs in May, yet consumer spending and retail sales rose during the same period. One of the only purchasing categories that experienced a decline last month was department store sales, which fell by 0.9 percent after dropping by only 0.2 percent in April. Barclays attributes the decline to a continued rise in online shopping sales: Sales at non-store retailers grew by 1.3 percent. On the whole, consumer spending rose by 2.5 percent compared to the same period a year earlier.

Americans may be spending more, but that doesn’t mean they’re neglecting to save: the 2016 Consumer Financial Literacy Survey, released in May, found that 26 percent of consumers are adding small amounts to their personal savings, a slight increase from 24 percent in 2015. Yet 26 percent of households also say they do not have any portion of their annual income saved for retirement.

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