Retail Sales Lose Momentum in July

Retail sales rose 1.2% in July after jumping an upwardly revised 8.4% in June. Sales rose at a 1.9% pace, excluding the volatile vehicle sector. A move into used vehicles in July likely held down the value of vehicle sales for the month. The vehicle sector is an area where credit has been easy for years but it’s beginning to tighten and likely will tighten even further, given a surge in defaults on vehicle payments in recent months.

The largest gains during the month were in electronics and appliances, but sales remained nearly 3% behind a year ago. That is probably due to the decision by Apple to close stores it had reopened in hot spots. Apple is one of the largest single movers in the electronics category.

Spending on furniture flatlined after surging in June in response to a jump in home sales. Spending at building material and garden stores fell a bit after rising in June. The housing market has come to embody the economic inequality that is magnified and exacerbated by COVID-19. Well-to-do first-time buyers rushed back into the market as soon as lockdowns eased, while deferrals on rent and mortgage payments by the hardest hit households soared. It is worth noting that those deferrals provided support for other types of spending in May and June, but that appears to have waned in July.

Spending at gasoline stations rose 6.2% after increasing at a double-digit pace in June. The bulk of that increase was due to higher prices at the gas pump. High frequency data on hotel occupancies and searches on mobile phones for directions suggest that vacation activity reached a plateau in July.

Core retail sales, which strip out spending on vehicles, building materials and gasoline, and feed into overall consumer spending for the quarter, rose 1.4% in July after surging 6% in June. Gains were extremely uneven. People spent more at restaurants and bars, with gains in states that continued to reopen offsetting a sharp slowdown in the worst of hot spots that in the Sunbelt. We saw a similar pattern in hiring at restaurants and bars in July.

Spending at clothing retailers continued to rise but remained almost 21% below year-ago levels. Spending at restaurants is almost 19% below this time last year. Spending at traditional department stores essentially flatlined after malls reopened in June. Sales at traditional department stores are down 13.4% from a year ago.

Retail bankruptcies continued to rise in July. We saw a modest return to online spending, especially in hot spots for the virus, but the bulk of those gains was greatest during lockdowns. Online spending is the fastest growing category of spending on a year-over-year basis.

Spending at food and beverage stores barely moved in July after contracting in June; that reflected the return of consumers to restaurants and bars. Spending at grocery stores continued at a double-digit pace from a year ago. A surge in the cost of food is distorting those gains and exacerbating a rise in food insecurity. This was before the supplemental $18 billion per week in unemployment insurance lapsed on July 31.

Bottom Line
Retail sales showed signs of slowing in July, which underscores our concern that the rebound is losing momentum. We expect to see consumer spending post robust gains in the third quarter, even if we lose some momentum in August, because of the high level at which we ended the second quarter. Our greatest concern is the fourth quarter, the most important time of the year for retailers. Halloween is the second largest holiday next to Christmas for consumer spending. Restaurants and bars could be especially hard hit with a second wave of the infections in the fall.

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