Christmas in July

Retail sales surged 0.7% in July, helped by Amazon Prime Day and the match by other retailers. Nonstore retail sales, which include the behemoth Amazon, posted a whopping 2.8% gain in July from June alone. That was the largest gain of any category during the month. Nonstore retail sales surged 16% from a year ago, two percent higher than we saw on a year-over-year basis in June. There were some slight downward revisions to June.

Traditional department stores, which had been laggards, also benefited as they added to their online sales. However, those gains will not be enough to slow the store closings we have seen this year. Sales at traditional department stores are still down nearly 5% from a year ago. Electronics stores joined traditional department stores with a monthly gain in July but still in the red from a year ago.

Weakness in July was concentrated in vehicle sales, sporting good stores and health care stores. Building and garden store sales were tepid, which is a disappointment given the surge in mortgage refinancing we have seen. In fact, spending at building and garden stores is down almost 3% from a year ago. Low mortgage rates have failed to deliver in spending on new home construction and remodeling, despite a surge in refinancing activity. Indeed, the recent drop in student loan volumes suggests that at least a portion of the proceeds of mortgage refinancing went to retire student debt.

Consumers were willing to kick up their heels a bit, which showed up as solid gains at restaurants and bars. This is an area we will watch closely as tariffs kick in later this fall. Discretionary spending is expected to be the hardest hit by rising tariffs although the blow should be less than initially expected, given recent moves by the administration to delay tariffs on the most popular holiday items.

The control group which excludes vehicles and gas station sales and feeds directly into GDP, increased 1% in July. That suggests the consumer should continue to drive overall growth in the third quarter. Some giveback to the surge we saw in response to Prime Day is expected in August. We could also see a slight pullback in response to recent market volatility. The key is employment. That will ultimately determine how we weather the trade storm.

Bottom Line
Today’s retail sales data underscore the theme that the consumer is playing Atlas, shouldering overall economic growth again in the third quarter. Data on the manufacturing sector posted modest gains for August. Now what we need to see is a comeback in business investment, which has seen another setback with further delays in deliveries of Boeing’s 737 Max. This is also cutting the number of flights that airlines can fly and could boost airfares in the fall.

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