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Consumers Power Ahead

RFP
Retail sales rose 0.5% in June. After another month of upward revisions saw May retail sales surge 1.3%. These results affirm our view that spending would catch up in spending in the second quarter after a lackluster first quarter.

Gains were driven by a sharp increase in spending on big ticket items - vehicles, furniture, and building materials stores - as consumers continued to buy SUVs and invest in their homes. Older homeowners have the most equity in their homes, which they are beginning to tap to make upgrades after a dearth of investment in housing in the wake of the crisis. The push to remodel has also limited the supply of homes for sales on the market, as existing homeowners are finding it more affordable to upgrade their current homes than attempt to trade up. This is especially true in some of the hottest real estate markets, which continue to see prices soar despite a rise in mortgage rates.

Discretionary spending at restaurants and bars was also robust, as consumer opted to kick their heels up and eat out instead of stay home. Online shopping came roaring back after a somewhat tepid May. We also spent a little more on health and personal care as well as big box discounters. Higher prices at the pump didn't seem to stop us despite tepid wage gains.

The losers in June where traditional department stores, sporting goods stores, clothing retailers, and grocery stores. With the exception of sporting good and grocery stores, those declines followed relatively strong gains in May.

Bottom Line
Retail sales follow a string of strong data which affirms our forecast for a sharp rebound in growth in the second quarter. Higher inflation, however, means that consumers likely took on debt and dipped into their saving to support those gains. We are expecting some moderation in spending over the summer, barring a sharp drop in prices at the pump and easing of tariffs, which are expected to erode purchasing power if they are enacted in August. The most recent round of tariffs on $200 billion more in Chinese goods could be particularly hard on low and middle income households.

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Karen Nye
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Karen.Nye@us.gt.com
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Na Tasha Lowe
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