Surging auto demand, which may be getting a lift from the prospect of higher borrowing costs, kept retail sales resilient amid tax hikes and budget cuts.
Retailers sold 0.6% more in May vs. the prior month, topping forecasts for a 0.5% bump, as auto sales climbed 1.8%, the Commerce Department said Thursday. Excluding autos, retail sales rose 0.3%, missing estimates.
Just as the recent spike in mortgage rates is inducing people to buy and refinance houses before borrowing gets even costlier, expectations that auto loan rates will rise could be spurring car shoppers too.
"They are careful about what kind of rate they'll pay," said Sung Won Sohn, an economist at California State University Channel Islands. "This is a good time to buy.
The retail data and upbeat jobless claim numbers helped U.S. stock indexes rally, despite another sharp retreat in Japanese markets. With the Federal Reserve meeting next week, investors worldwide are reacting to any hints of when monetary stimulus might start to slow.
Low interest rates have made cars more affordable. In Q1, the average monthly payment for a new vehicle financed was $459, down from $462 in Q1 2012, according to Experian, adding that leasing hit a record high.
While higher rates should reverse that trend, demand is also being propped up by the need to replace the existing fleet, which has an average age above 10 years. The housing recovery is encouraging contractors to buy new trucks as well.
Americans are benefiting from steady, albeit tepid, job creation too. Inflation has been subdued, and higher home and stock prices are making people more willing to spend.
"Consumers are not sprinting, but walking briskly," Sohn said.
People bought 0.4% less from bars and restaurants in May, and instead spent 0.7% more at grocery stores. Online and other nonstore sales rose 0.7%.
Receipts at clothing stores slid 0.2%, but sales were up 0.9% in home improvement and 0.6% in sporting goods. Gas stations sold 0.2% less.
Unseasonably cold weather depressed sales in March and April, forcing businesses to unload inventories with heavy promotions in May, Sohn noted.
But furniture store sales slid 0.8%, their fifth straight decline, despite improving home sales. Electronics and appliance stores sold 0.4% less and have seen flat or declining receipts for five of the last six months.
Overall, the latest figures point to stronger consumers and "positive feedback loops" that could support U.S. growth, even as the rest of the world limps along, said Robert Dye, Comerica Bank chief economist, in a research note.
With monetary stimulus poised to slow, resilient consumers could smooth the transition from five years of expansive policy to a phase Dye calls "The Great Policy Unwind."