It's never wise to underestimate the power of the American consumer, which has kept America's economy humming through a year and a half of inflation chaos.
A white-hot retail sales report Wednesday demonstrated the resilience of US shoppers in the face of rising prices. That could help companies continue to grow profit, even as high interest rates threaten to take a bite out of earnings, Bank of America told clients in a note.
Corporations are juggling an ever-growing collection of risks — rising wages, higher financing costs and inventory imbalances — but they're still managing to keep profit margins strong, analysts wrote. That's largely because of "nimble cost-cutting and US consumer resilience," they said.
What's happening: US retail sales grew in January by the most in almost two years, soaring 3% from December, the Commerce Department reported Wednesday. Economists had anticipated sales would rise by 1.8%.
Disposable income likely surged in January because of astonishing job growth, inflation-related adjustments to salaries in the New Year and an 8.7% increase in Social Security benefits that boosted spending among older households.
All that extra cash should support strong spending through February and perhaps March, said Bank of America analysts.
While the retail sales number is not adjusted for inflation, Americans still appear to be indulging in a healthy dose of retail therapy despite ominous economic forecasts.
Consumer spending accounts for about 70% of America's gross domestic product, the broadest measure of the US economy, so it's nearly impossible for the economy to enter a recession as long as consumer spending is growing.
Bank of America lifted its estimates for first-quarter GDP to 2% from 1% on the back of Wednesday's strong report, showing that shoppers are single-handedly keeping the US economy afloat.
The inflation problem: Low levels of unemployment and robust spending are signs of a thriving economy. That's typically a good thing for Wall Street investors; but when the Federal Reserve is actively trying to squash high inflation rates, they risk becoming a fly in the ointment.
The high rate of spending could agitate investors in this good-news-is-bad-news economy because it adds to inflationary pressures. That means the Fed may use the strong data as an excuse to keep hiking interest rates.
Central bankers are already anxiously awaiting Thursday's Producer Price Index inflation data after Tuesday's Consumer Price Index report showed that inflation ticked up from December to January and annual inflation fell less than expected.
A slowdown in consumer spending could lead to recession down the road but most economists say that's still a better outcome than the long-term pain that entrenched inflation could bring.
"January's strong retail numbers are the most recent in a string of data that suggest that the economy should continue to expand in the near term," said Jim Baird, chief investment officer at Plante Moran Financial Advisors.
"That also means that the Fed is likely to go even further to tighten conditions to achieve its policy goals. Recession risk may be deferred, but it certainly hasn't dissipated."
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