Retail sales (people buying cars!) up in May

INDICATOR: May Retail Sales/Weekly Jobless Claims

KEY DATA: Retail Sales: +0.6%; Vehicles: +1.9%; Excluding Vehicles: +0.3%/Claims: 334,000 (down 12,00)

IN A NUTSHELL: "Households are holding up their end of the bargain and with the labor market seemingly firming a touch, we just might see more jobs and more spending going forward."

WHAT IT MEANS: The big unknown has been how tax increases and sequestration cut backs would slow consumer spending. Well, it unquestionably has, but it looks like the underlying strength in the economy and an improving economy is allowing households to keep up their visits to the malls and their favorite websites. Retail sales rose sharply in May led by the continued improvement in vehicle demand. There were also gains posted by stores selling food, sporting goods, building supplies and general merchandise. On the other hand, gasoline purchases were off as prices were down during the first half of the month while furniture, electronics and appliance demand dropped. Furniture stores have not done well this year and electronics have been hit or miss. I guess with no breakthrough electronic device, the urge to splurge on the newest concept is missing from sales

Whether the decent spending we see can be maintained depends upon the labor market and the drop in the weekly jobless claims numbers is hinting that conditions are getting better. However, the April Job Openings, Layoffs and Terminations (JOLTS) report showed that while hiring did pick up, job openings didn't. So it is still unclear to what extent the job market is getting better.

MARKETS AND FED POLICY IMPLICATIONS: Households are still out there spending their money. They may not be irrationally exuberant or even exuberant, but consumption is growing at a decent pace. That shows how resilient is the economy. It is being tested by government spending cuts, tax increases and tight compensation practices but the economy is expanding nonetheless. Imagine how strong growth would be if government stopped doing silly things and businesses started sharing more of the wealth. Politicians will keep doing what politicians do but the markets will ultimately drive wage and salary decisions. With the unemployment rate at 7.6%, there is little reason to raise wages and companies will not do that until they have to. Thus, it is hard to see how we can get out of this 2% to 2.5% growth trend unless sanity hits Washington (doubtful) or the unemployment rate starts moving through the sixes - and that is not likely to happen for quite some time.