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In just a few weeks the incoming data have tilted decidedly downwards and that point was driven home this week by a reported drop in March retail sales as well as a sharp drop in early April consumer sentiment .
To be fair, March retail sales data were impacted by temporary factors such as adverse weather conditions, delayed tax refunds, and a reversal in gasoline prices. But there were plenty of signs, which included downwardly revised sales in the previous two months that lead us to believe the data indicate the consumer adjustment to lower disposable income at the start of the year has begun. Retail sales tend to track changes in disposable income, and typically with some lag.
One of the most pertinent questions this year: “why hasn’t there been a pullback in consumer spending in response to higher taxes?” appears to have been answered. We had expected it to take US households time to adjust spending priorities in the wake of 1 January tax increases, but we had expected the adjustment to begin in February. It appears we were one month early in that expectation.