Premature Gains in Retail Sales

Retail sales rose 7.5% in June after surging an upwardly revised 18.2% in May. Sales regained much of what was lost to COVID-19 in March and April, coming close to the high-water mark hit in January before COVID-19 infections hit. It is important to note that retail sales do not include spending on a broad spectrum of services, which are still crippled by COVID-19. As malls and places to dine and party reopened in June, consumers went back into stores, restaurants and bars; they actually backed off from spending online and at grocery stores.

Traditional department stores, which have been losing ground for a long time, saw a resurgence albeit off of dismal levels. The biggest winners during the month were clothing stores where sales more than doubled in June after nearly tripling in May. The level of spending at retailers more broadly, however, remains suppressed and not enough to ward off more bankruptcies.

We saw continued gains in big-ticket spending. Vehicle sales, mostly light trucks and luxury models, continued to rebound while spending on furniture and appliances increased at a double-digit pace. We are still redecorating and refurnishing our homes, but spending on building material and garden centers fell slightly in June. That is likely due to the surge in May, rather than an actual retrenchment in June. Those who have the extra money to spend are repairing and remodeling their homes, deepening the divide with those who don’t.

The other standout category is spending at sporting goods stores, which hit a new high in June. People have scrambled to buy home exercise equipment to avoid gyms where the risk of contagion is high.

Sadly, the good news is backward looking. Restaurants, bars, stores and gyms have partially rolled back reopenings as a surge in infections has triggered caution by consumers. Credit card data for early July shows a shift back to online spending as consumers became more cautious about going out.

The fall in spending at grocery stores could also be short-lived as consumers pull back on dining out. More worrisome is the surge in prices. The cost of groceries could not be rising at a worse time, when millions are about to lose unemployment insurance. It is hard to digest the gross inequality evident in the data. Low-wage workers are facing evictions and food insecurity, while wealthier consumers are buying new homes and cars.

Bottom Line
June gains in retail sales are welcome but likely fleeting. The surge in COVID-19 infections and hospitalizations has since triggered a pullback. We will not know the degree of that until August when the data for July is available.

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