By Bondsquawk:

Retail Sales for April declined by a 1.2 percent which is a disappointment after economists expected a rise of 0.2 percent. Goldman Sachs says that the headline is misleading and is less disappointing. However, the overall trend is still relatively weak.

Two special factors make the sharp drop in the headline a misleadingly weak read on retail spending in May. First, the building materials component, which had risen sharply in March and April due to a federal stimulus program for “clunker” appliances, gave back almost two-thirds of the 17% (not annualized!) surge during those two months. Also, receipts of gasoline stations fell 3.3% on the month (also not annualized) as prices at the pump failed to post the increases that normally occur in May.

By stripping out business materials, gasoline, and autos, core retail sales rose 0.1 percent which Goldman Sachs describe as “anemic” after following a 0.2 percent drop in April.

Taking the April/May average relative to the first quarter, the data now suggest about a 3½% annualized increase in (nominal) consumer spending on goods other than vehicles, as compared to nearly 8% in Q1. So the report does support the case for a slower growth rate in real consumer spending even after the distortions are stripped away. As a result, we see no reason to change our estimate that real consumer spending is rising at about a 2½% annual rate in Q2, down from 3.5% in Q1.

In addition to the Retail Sales report, consumer sentiment appears to be improving as the Univeristy of Michigan released its figures for June. The sentiment index increased from 73.6 in the prior period to 75.5 which exceeded surveys of 74.5. BNP Paribas wrote that

Lower gasoline prices appear to have boosted consumer optimism. 5-10 year inflation expectations, the figure tracked by the Fed policy makers, eased to 2.8% from 2.9% previously closer to the lower end of the historical range.