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Are U.S. retail figures distracting from reality of discretionary spending?

In this Dec. 20, 2012 photo, people walk through the Fashion Island shopping centre in Newport Beach, Calif. U.S. holiday retail sales this year are the weakest since 2008, after a shopping season disrupted by storms and rising uncertainty among consumers.

Chris Carlson/AP

February's U.S. retail sales figures are getting people excited.

The value of purchases rose 1.1 per cent from January, more than every one of the 82 analysts surveyed by Bloomberg News had expected. (The median estimate was for a 0.5-per-cent gain.) In January, sales increased 0.2 per cent on the month.

As a result of the retail numbers, Wall Street economists are revising their estimates for first-quarter growth. Most estimates now are in the range of an annual rate of about 2.5 per cent. Deutsche Bank economists see growth at an annual pace of 3 per cent, which is the kind of growth you need to make a serious dent in unemployment.

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Consumers were supposed to be retrenching. Payroll taxes rose at the start of the year, meaning the federal government welcomed every U.S. taxpayer to 2013 with a pay cut. The budget battles continued into February, with lots of talk of $85-billion in across-the-board spending cuts from the "sequester." This too was supposed to spook consumers into keeping their wallets and purses shut.

A positive "wealth effect" from rising stock markets and home prices seems to be offsetting the negatives from marginally higher taxes. As Paul-André Pinsonnault and Matthieu Arsenault, economists at National Bank Financial in Montreal, observed Wednesday, hiring, the stock market and home prices all are trending higher simultaneously for the first time since the end of the recession.

"All that is good for confidence," said Craig Alexander, chief economist at Toronto-Dominion Bank. "It's offsetting the shock of opening your paycheck and seeing you have less money to put in the bank."

So does that mean economists overestimated the effects of higher taxes and sequestration? It's worth watching. But there's not enough evidence yet to conclude the consensus was wrong.

The headline sales figure from February distracts from evidence in the report that suggests consumers did pull back on discretionary spending. Sales at furniture stores dropped 1.6 per cent from January; sales at electronics stores declined 0.2 per cent on the month; sales at sporting goods, hobby, book and music stores fell 0.9 per cent; and sales at restaurant and bars decreased 0.7 per cent.

None of that was enough to offset a jump in demand for automobiles, groceries and building supplies. (The biggest increase – 5 per cent – was posted by gasoline stations because of higher fuel prices.)

But compare the gainers and losers. There's a qualitative difference between the categories. There's reason to think U.S. consumers were cutting down on discretionary spending at the start of the year. They haven't retrenched, but nor are they going crazy, which is why Mr. Alexander says it's too soon to sound an all clear. He said he thinks U.S. growth will slow again in the second quarter.

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