Retail sales moderate in Q1
Total retail sales declined in the first quarter despite modest gains in February and March. This wasn't unexpected: motor vehicle sales plunged during the quarter following one of the strongest quarters on record for auto and light truck sales. On the whole, sales were generally stronger among most of the components in the first quarter relative to the fourth quarter of last year. However, the gains were mostly modest. And it is worth keeping in mind that a good chunk of the gains at gasoline stations came from higher prices rather than a larger volume of sales. The chart below shows the growth in retail sales, less autos, and less autos & gasoline. Notice that retail sales less autos showed the largest gain since the first quarter of 2000! But once one takes into account the higher gasoline prices and looks at retail spending less gas station purchases as well, then sales were weaker than in the fourth quarter.

On the whole, the retail sales picture isn't bleak by any means. But it does confirm the expectations of many Wall Street economists (and Fed officials) that lack of pent-up demand for motor vehicles and housing (furniture & appliances) would squash the recovery in retail sales.

The early reading on the University of Michigan's consumer sentiment index showed a slight dip in confidence to 94.4 in the beginning of April relative to the March final of 95. This is not suggesting that consumer optimism is fading necessarily, but absent any good news on employment conditions or the stock market, consumer sentiment is not likely to improve rapidly.

Keep in mind that consumer confidence does not translate to any particular level of retail sales. Recently, several articles have been written on the usefulness of confidence surveys (or lack thereof) in predicting retail sales. The majority of economists have never claimed that consumer confidence predicts monthly retail sales. The most that one can say about consumer confidence is that it tends to move in tandem with spending patterns. On the whole, optimistic consumers will spend more than pessimistic consumers. But remember that the optimism probably stems from an individual's financial status. Unemployed workers will have a dimmer financial picture and are likely to be more pessimistic about economic conditions.

Energy prices boost PPI
The producer price index jumped 1 percent in March after posting more modest gains in the two previous months. A 5.5 percent spurt in energy prices was the culprit. Even with the March gain, the year-over-year change in the PPI was still negative (-1.4 percent), but not as negative as previous months. If energy prices continue to rise in this manner over the next couple of weeks, the April PPI could be equally ugly.

But excluding food and energy prices (core), the PPI edged up 0.1 percent. Notice that the yearly rise in core PPI remained subdued at +0.4 percent. Aside from the energy front, inflation is not a problem. A similar picture emerges from the PPI at earlier stages of processing. The intermediate goods price index excluding food and energy rose 0.3 percent in March but is down 1.7 percent from a year ago. The crude materials price index less food and energy fell 0.7 percent in March and is down 6.6 percent from a year ago. It doesn't appear that inflation is in the pipeline at this point.