Retail Sales Data Shows Surge In Consumer Spending: 5 Picks

U.S retail sales data for the month of May and April clearly shows a surge in consumer spending, eliminating concerns expressed by some economists that the economy is likely to lose momentum in the second quarter of 2019. Notably, at the end of this month, the U.S. economy is expected to record its largest expansion in history.

Increase in May retail sales was broad-based, reflecting solid gains in almost all categories. At this stage, it will be prudent to invest in consumer discretionary stocks with a favorable Zacks Rank and strong growth potential.

Healthy Retail Sales Data

On Jun 14, the Department of Commerce reported that retail sales increased 0.5% in May. Although the metric lagged the consensus estimate of an increase of 0.7%, it still indicates a fare number. Moreover, retail sales in April were revised to a gain of 0.3% from a loss of 0.2%, marking an improvement of 0.5%. Retail sales remained positive for the third straight month.

Sales at auto dealerships accelerated 0.7% in May after declining 0.5% in April. Receipts at service stations climbed 0.3%. Building materials and garden equipment sales inched up 0.1%. Online and mail-order purchases surged 1.4%. Sales at bars and restaurants grew 0.7% in May.

Consumer Spending Expected to Remain Robust

In May, core retail sales (excluding auto sales) jumped 0.5%. For April, core retail sales were revised upward by 0.4% from the previously unchanged figure. Since auto sales constitute around 20% of total retail sales and sales of the auto industry remain vulnerable, core retail sales primarily correspond to the consumer spending part of U.S. GDP.

Robust increase in core retail sales in the first two months of second-quarter 2019 indicates that consumer spending also remained robust. Notably, consumer spending constitutes two-third of U.S. GDP. Consequently, momentum of the U.S. economy is expected to remain firm in the second quarter, sidetracking concerns raised by some economists for a slowdown.

U.S. GDP Likely to Hold Momentum

Several economists have estimated that real consumer spending is up more than 4% annually so far in the second quarter. This is a much higher rate than an increase of 1.3% in the first quarter of 2019. Notably, U.S. GDP growth was 3.1% in the first quarter.

Several economists have raised eyebrows about the health of the U.S. economy buoyed by some tepid economic data released in the past one month. Non-farm payroll increased just 75,000 in May. Wage rate retreated to 0.2% compared with the consensus estimate of 0.3%. Inflation --- both core personal consumption expenditure (PCE) index and consumer price index (CPI) --- remained subdued at 1.6% and 0.1%. The Fed’s target rate was 2%.

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However, consumer confidence index skyrocketed in May to 134.1, its highest level since November 2018. More importantly, the Expectations Index, which is a measure of the consumers’ short-term (for next six months) outlook for income, business and labor market conditions, surged to 106.6 from 102.7 in April. Strong consumer confidence data indicates that consumer spending is likely to witness robust growth in the coming months thereby boosting the second quarter GDP.

Our Top Picks

We have narrowed down our search to five consumer discretionary stocks with strong growth potential. Each of these stocks sports a Zacks Rank #1 (Strong Buy). You can see Zacks Investment Research