The economic data came in good for a change this morning as the latest read on consumer activity came in better than what analysts had expected.
Consumer spending, according to the Commerce Department, was stronger than expected in March as demand remained high despite declining sentiment.
The latest retail sales activity showed an increase of +1.4% for the month of March. That number was better than the +1.2% estimate given by Dow Jones and economists.
The March figure was also higher than the 0.2% increase seen in the data in February.
The reading points to spending holding strong despite the whiplash activity in tariffs between the U.S. and its trading partners like China, the EU, Canada and Mexico.
Consumers are stocking up on items that are likely to be hit even harder by impending tariffs.
Consumer activity increased heavily in the auto industry along with auto parts as buyers looked to buy more expensive items ahead of the activation of tariffs on these products to save money.
Retailers have also seen a marked increase in activity on high prices electronics items such as televisions, computers and smartphones as consumers try to slip their product purchases in under the deadline for 10-25% and higher tariffs.
The short answer is “no”. The higher retail sales figures suggest that this is nothing more than a moment at which mart consumers are taking advantage of what is likely to be the last chance to avoid tariffs. Economists are likely to start forecasting April and May expectations lower as new tariff pricing finds its way to the consumer’s cost.
On Tuesday, United Airlines reported that domestic air travel demand has been slowing. The company is reacting by reducing the number of domestic flights available. The trend – in its infancy – may suggest that consumers are now cutting back on discretionary items such as travel, high-end retail, furniture and other non-necessary items. The move is often made as consumers prepare to tighten their budgets even further.
From a big picture perspective, tight consumer activity is almost always a predicator to slight recessions.
Last month’s Consumer Confidence Index dropped to its lowest readings since 2021, when the market was recovering from the short recession triggered by the pandemic in 2020.
This drop is different from then as the decline started months ago as consumers looked at the prospects of higher inflation and slower economic growth developing in 2025. The additional volatility and uncertainty of the newly struck trade wars is likely to continue the drop in consumer confidence.
For now, the most logical steps that investors can take is to avoid exposure in consumer sensitive stocks and industries.
The Consumer Discretionary Select Sector ETF (XLY) and S&P Retail ETF (XRT) are the two most effected exchange traded funds by the continued decline in consumer activity and confidence.
Both have moved into long-term bear market trends as of the beginning of April for the first time since the pandemic triggered a recession in 2021.
There are a few exceptions in the retail sector such as Kroger (KR), Walmart (WMT) and Albertsons (ACI). Note that these companies are less “discretionary” as they represent products that are less elastic in demand with price fluctuations.
Outside of these “staples”, retail and discretionary stocks should be avoided through the summer until the market reaches it seasonally strong period of the year starting at the end of August.
