Retail sales in the U.S. remained unchanged in June, as a drop in auto dealership receipts was offset by strength in other sectors. The report from the Commerce Department showed that sales in May were higher than initially estimated, indicating consumer resilience and boosting economic growth prospects for the second quarter. This positive data did not change expectations that the Federal Reserve could begin cutting interest rates in September due to cooling inflation. Bill Adams, chief economist at Comerica Bank, stated that while there are signs of softness among low- and moderate-income consumers, affluent consumers’ spending is keeping the economy moving forward.
Economists had predicted a 0.3 percent decline in retail sales for June, following a previously reported 0.1 percent gain in May. However, sales increased by 2.3 percent year-on-year in June, although this momentum has slowed since January 2023 when there was a 7.7 percent gain. It seems that households are trading down and seeking cheaper alternatives after a period of high inflation. Major retailers and manufacturers have reported earnings reflecting this trend.
Online store sales saw a significant jump of 1.9 percent in June, following a 1.1 percent increase in May. On the other hand, sales at gasoline stations dropped by 3.0 percent due to lower prices at the pump. This decrease in gas prices likely freed up money for other types of spending. Building material and garden equipment store sales increased by 1.4 percent, while sales at food services and drinking places increased by 0.3 percent. Economists view dining out as an important indicator of household finances.
Furniture store sales rose by 0.6 percent, and electronics and appliance outlets saw a 0.4 percent increase in receipts. Clothing retailers also experienced a 0.6 percent increase in sales. However, sales at sporting goods, hobby, musical instrument, and book stores dipped by 0.1 percent. Motor vehicle and parts dealers saw a decline of 2.0 percent in sales, which can be attributed to a cyberattack at software systems provider CDK that affected operations at several auto dealerships in June. It is expected that sales lost due to the cyberattack will be recouped in July.
Despite concerns about a significant moderation in the economy following a rise in the unemployment rate to a 2-1/2-year high of 4.1 percent in June, Fed Chair Jerome Powell’s recent remarks at an Economic Club of Washington event did not indicate an imminent rate cut. Financial markets now expect a rate cut in September, followed by additional cuts in November and December.
While this report does not negate expectations of a rate cut in September, inflation-related data releases could still influence the Fed’s decision. Import prices were unchanged in June, suggesting that inflation is likely to remain on a downward trend.
Retail sales excluding automobiles, gasoline, building materials, and food services increased by 0.9 percent in June, after a 0.4 percent increase in May. These core retail sales closely correspond with the consumer spending component of gross domestic product (GDP). Economists now estimate that consumer spending, which accounts for over two-thirds of the economy, grew at a 2.0 percent annualized rate in the second quarter. This is higher than the previous forecast of a 1.5 percent growth rate, indicating a stronger performance in consumer spending heading into the third quarter.
A separate report from the Census Bureau showed that business inventories rose by 0.5 percent in May, further supporting growth prospects for the second quarter. The Atlanta Fed has upgraded its GDP growth estimate for the second quarter to a 2.5 percent rate from a 2.0 percent pace. In comparison, the economy grew at a 1.4 percent rate in the first quarter.
However, there are still hurdles for consumer spending. Many households have depleted the excess savings accumulated during the COVID-19 pandemic and are carrying significant credit card debt, which is becoming more expensive due to higher borrowing costs. Wage growth is also slowing as the labor market eases. Ben Ayers, senior economist at Nationwide, noted that lower-income households are most sensitive to increases in everyday costs and are at the greatest risk for cutbacks in hiring.
In conclusion, the unchanged retail sales in June indicate consumer resilience and support economic growth prospects for the second quarter. While some sectors saw declines, online store sales and sales in other sectors offset these losses. The outlook for a rate cut in September remains unchanged, with inflation expected to stay on a downward trend. Core retail sales, which closely correspond with consumer spending, have seen strong growth, setting consumer spending on a higher growth path heading into the third quarter. However, hurdles such as depleted savings and slowing wage growth remain for consumer spending, particularly among lower-income households.
