Simply the best

• Economy warmed in March
• Retail sales heading for a record year
• Inflation in context
• Labor market tightening
• Retail centers ready to capitalize

Earlier this year we predicted that nominal retail sales growth could set a record for the fastest calendar-year growth ever. One quarter into the year that projection looks on track. Retail sales for March grew at a month-over-month rate of 9.8%. That represents the second-fastest month in history, exceeded only by the monumental 18.3% from May of last year. What’s driving such strong growth? Two key items. First, fiscal stimulus via the American Rescue Plan Act, signed into law in March, put money into consumers’ pockets and they spent some of that money. Something similar occurred in May and June of last year after the CARES act passed and then in January of this year after the Consolidated Appropriations Act (which also provided Covid relief) passed in December. Second, improved weather in March following inclement winter weather across a large swath of the country in February boosted sales. In the first quarter, retail sales grew by roughly 15%. Unless retail sales contract significantly in later months, which seems highly unlikely, nominal retail sales appears headed for a calendar-year growth record. 

Such strong growth in March forces us to wonder if this represents the high watermark for monthly sales growth rate this year. The confluence of such a dramatic weather change coupled with what will likely constitute the last round of direct fiscal stimulus to households during this cycle strongly hints at such an outcome. But consumers are still sitting on roughly $2 trillion of dry powder and more spending certainly lies ahead as the economy reopens and more normal economic activity resumes. We continue to expect very robust monthly retail sales growth and will keep a keen eye on the data to see if later months can eclipse March for the fastest growth rate this year.

Some like it hot

Inflation data for March, measured by the consumer price index (CPI), reflected both the resumption of economic activity and low base effects (low prices from March 2020 due to the pandemic). This pushed the year-over-year headline CPI to 2.6%, up from 1.7% in February, and the fastest pace since August 2018. Something similar occurred with the import price index in March, which increased by 1.2% on a month-to-month basis following a stout 1.2% monthly increase in February. We continue to expect inflation to increase as the economy reopens, pent-up demand gets unleashed, base effects persist for a while, and some supply-side issues combine.

But we expect this run-up in inflation to remain transient, much like previous cycles, even though we predict stronger inflation this cycle than during the previous cycle. For context, during the recovery from the financial crisis, headline CPI peaked at a year-over-year growth rate just above 3.8% in September 2011. Despite occurring during a period of tepid economic growth (real GDP growth registered just 1.6% in 2011) inflation did not derail the recovery because it was rightly viewed as transient. Looking at calendar-year data from the last cycle shows no meaningful relationship between inflation and GDP growth. If anything, removing outliers shows a somewhat positive correlation. But what about inflation impacting subsequent periods? Even when we lag the data by one year or even two years it shows no meaningful relationship. The conclusion? The health of the economy depends upon more than inflation, certainly more than transient inflation coming out of a recession. 

9 to 5

Initial unemployment claims also reflect the momentum in the economy, with more individuals returning to work. Claims for the week ended April 10 came in well below expectations and U.S. unemployment reached its lowest level since the week ended March 14, 2020. Yet initial claims remain elevated, and roughly 24% of unemployed workers have remained unemployed for at least a year. The strengthening of the economy in subsequent months, coupled with more widespread vaccination, should cause initial claims levels to continue to decline. Increasingly, open but unfilled jobs also increased, a reminder than the U.S. is still contending with a labor shortage likely exacerbated by excess retirements in 2020. In short, the labor market continues to convalesce, and very quickly qualified labor is becoming scarce.

What else happened last week?

Preliminary consumer sentiment for April fell short of expectations but still reached its highest level since March 2020. This should head higher with the economy improving this year. Housing starts and building permits for March both bounced back after some weather-related disruptions in February. Both should fare well this year amidst the ongoing housing shortage. 

|  What we are watching this week  |

New home sales likely rebounded strongly in March with the arrival of more favorable weather. Existing home sales for March likely increased slightly but remains limited by a lack of inventory for sale. 

|  What it means for CRE  |

Commercial real estate (CRE) should benefit from rapid economic growth this year, with retail poised to fare better than many expect. Record-setting nominal retail sales should boost the fortunes of retail centers, some of which are already seeing relatively robust interest from tenants, especially open-air centers in favorable climates. Yet pent-up consumer demand should also benefit enclosed centers as more of the population gets vaccinated and resumes some semblance of normal life and economic activity. 

|  Thought of the week  |

According to the consulting firm McKinsey, single countries (though not the same country) have monopolized the exportation of roughly 180 different products, demonstrating the risk of concentration in supply chains and potential bottlenecks.