Retail sales fell in May after April sales were revised lower. This is the first drop in sales since December 2021. Sales reflect both activity and prices; consumers spent less last month in a rising price environment. Rising interest rates and high prices at the gas pump are taking a toll on discretionary spending. Consumers have been pulling back from spending on big-ticket items and pivoting to essentials and travel.
Spending on vehicles and parts plunged in the month; the loss was still on short supplies. The pivot from goods to services is happening but not smoothly. Spending by wealthy households is buoying inflation and spending on vehicles, in particular. It will wane but the lags strengthen the Federal Reserve’s resolve.
Spending on items for the home, such as furniture and appliances, fell in May. Rapidly rising mortgage rates coupled with record-high home prices have already taken many would-be buyers out of the housing market. When home sales are strong, so are sales for the big-ticket items needed to fill those homes. Big-box discounters found themselves with too much inventory of furniture and appliances so they slashed prices.
Spending at gas stations rose 4% in the month after dipping last month as fuel prices rose across the country; spending is actually flat after adjusting for inflation. Travel over the Memorial Day weekend surpassed 2019 levels for the first time since the pandemic began. Prices at the gas pump continue to rise in June and will further hurt households that have already dipped into their excess savings to be able to afford necessities.
Spending at grocery stores rose 1.2% in the month as price increases for food remained broad-based. Spending at restaurants and bars rose 0.7% in May, a slowdown from the previous month, and flat after adjusting for inflation. Spending is now up 17.5% compared to a year ago, well above inflation. Staffing shortages remain a problem and are adding to inflation even as wage gains slow. Roughly half of consumers plan to curb discretionary spending over the next months in response to inflation. Not good from the Federal Reserve’s perspective. Their goal is to have inflation so low it doesn’t distort behaviors; that is not where we are.
Department stores saw spending rise in May. Sales in clothing and accessories stores were flat for the month as spending on women’s clothing was a drag on gains in other categories. The surge in men’s work apparel prices has been stunning; that reflects many store closures and consolidation in the larger market for more formal work clothes. The exception is spending on wedding and formal wear, as many catch up after delays due to the pandemic.
Online shopping fell 1% from the previous month as consumers pivot to spending on services and travel. High-income households are dominating gains in spending, which is adding to inflation pressures even as low- and middle-income households cut back. Consumer sentiment hit the lowest level since 1940 in June, as measured by the University of Michigan consumer sentiment survey. That is the most inflation-sensitive measure of consumer attitudes.
Core retail sales, which feed directly into GDP data, were flat on the month and fell after adjusting for inflation. Higher inflation and the bite of higher interest rates in the housing market are to blame. The problem is the persistence of spending on travel, tourism and services more broadly. That is driven by the wedge between wealthy households and the rest of the economy.
Inflation is taking a bite out of consumer spending but not far enough to stop the Fed from hiking rates. They now need to deal with inequality and the impact that has on living standards. Sadly, the Fed is behind the curve and knows it. The Fed realizes that there is no easy way out; it is willing to trade higher unemployment to prevent more entrenched inflation. A recession by any other name is still a recession; unemployment will rise.
Measuring current economic conditions to help plot and adjust course
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