Structural Issues Impede Recovery

Suddenly many of those green shoots that gathered so much attention a few weeks ago appear to be losing some of their bloom. One of this week's major disappointments was a larger-than-expected drop in retail sales. Overall retail sales fell 0.4 percent in April and sales excluding the volatile motor vehicle sector fell 0.5 percent. Moreover, declines for March were somewhat worse than first reported.

Gains in retail sales in January and February had raised hopes that the worst was over. Consumer spending actually posted a modest inflation-adjusted gain in the first quarter. We had warned back in late March that is was too soon to buy into a stabilization of retail sales. Much of the improvement in January and February was merely a statistical artifact, reflecting a smaller than usual decline following an unusually weak holiday season.

Overall retail sales in April fell 0.4 percent, following a 1.3 percent drop the prior month. Part of April's drop was attributable to falling gasoline prices. Sales at gasoline stations fell 2.3 percent in April.