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Retail Sales Up -- Should the Fed Taper?

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Is the economy well settled on its growth trajectory? Well, for now it seems so as the latest retail sales data released by the U.S. Department of Commerce validates this. Renewed consumer confidence and the festive mood were well reflected in the November retail sales number that rose 0.7%, led by surge in auto sales. The gain, which is the most since Jun 2013, followed a 0.6% rise witnessed in October; thus removing the cloud of obscurity about economic growth. 

However, excluding auto sales, retail sales climbed 0.4%. Auto sales increased 1.8% in November, the highest in six months. A recovery in the housing market, surging stock portfolios, strengthening manufacturing sector and improving labor market condition are playing vital roles to help the consumer confidence move north and propelling economic recovery.

Consumer confidence is a key determinant for the economy’s health with consumer spending accounting for over two-third of the U.S. economic activity. The preliminary data for December released by University of Michigan and Thomson Reuters showed that consumer-sentiment index jumped to 82.5 from November’s reading of 75.1 buoyed by improving fundamentals.

What is inspiring consumer spending is the improving job prospects, with unemployment rate declining to a five-year low of 7% in November. Further boosting sentiment was the total non-farm payroll data that said employment grew 203,000 in November, higher than the consensus estimate of 182,000.

National Employment Report released by Automatic Data Processing (ADP - Free Report) stated that the U.S. nonfarm private sector employment added 215,000 jobs, higher than the expected increase of 173,000 jobs, and crossed 200K for the first time in 12 months.

However, the latest report from Labor Department may be troublesome for investors that indicated initial claims for jobless aid has risen 68,000 to 368,000. But there are more positives prevailing in the economy to offset this. The strong November retail sales data hints of a healthy holiday season ahead and talks about regained consumer confidence that was battered by higher payroll taxes, recent political tussle and the 16-day partial U.S. government shutdown.

So far this year, the broader markets have showcased signs of a better pace of recovery and have thus infused hopes of a better economic scenario going forward. Though this statement is debatable, the significant recovery in the stock market is reflected through strong gains for the broader market indices. S&P 500 has clocked gains of roughly 21.4%, while Dow Jones Industrial Average has advanced approximately 17.3% so far this year. The Nasdaq Composite Index has increased 28.5% year-to-date.

Now with improving economic prospects, the question arises, “Should Federal Reserve start tapering its $85 billion monthly stimulus program that was initiated to keep interest rates low and boost economic growth?” Fed Officials in the past have been hinting of gradual roll back of the stimulus package in case the economy shows signs of recovery. With encouraging economic numbers coming out of late, chances of tapering look a near possibility.

Market watchers had previously anticipated that the Federal Reserve would begin tapering its stimulus program early next year. Such expectations were strengthened following earlier announcements that it would reduce its bond purchases only when certain economic indicators reached desired levels. This included a significant decline in the unemployment rate. The nonfarm payrolls report supports expectations that the economy has recovered to the point where it can withstand reductions in Fed bond purchases.

After going through the above facts, a sense of optimism comes in our mind. It looks like the economy is now steadily making its way out of the woods, and we hope the arrival of Christmas will shed consumers’ apprehension and drive demand.

If everything goes well and consumer confidence further rises with improving economy, then we could see a spur in demand with willingness to shell out more this holiday season - bringing cheers to retailers such as Macy’s, Inc. (M - Free Report) , Kohl’s Corp. (KSS - Free Report) , J. C. Penney Company, Inc. (JCP - Free Report) , Nordstrom Inc. (JWN - Free Report) , L Brands, Inc. (LB - Free Report) , The Gap, Inc. (GPS - Free Report) , The Buckle, Inc. (BKE - Free Report) , Ross Stores Inc. (ROST - Free Report) , Wal-Mart Stores Inc. (WMT - Free Report) , and others.

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