Shortages and Prices Curb Spending

Retail sales dropped 1.1% in July after being revised up slightly to a gain of 0.7% for June. The data fell well short of market expectations despite backward revisions. Higher prices, the waning of fiscal stimulus - most of the boost from stimulus checks has been spent - and acute shortages, notably in the vehicle sector, all contributed to the abrupt halt in July. Expansions to the child tax credit, which started to be paid out in monthly checks in July, helped blunt the blow to overall spending.

Vehicle sales alone dropped more than 4% between June and July as dealer inventories continued to shrink and prices continued to rise. Sales remained up at a double-digit pace from a year ago, mostly on higher prices. Used vehicle prices have actually come off their peak at the wholesale level but dealer margins have widened; those shifts are starting to take a toll on consumer attitudes regarding vehicle purchases. Prices can’t rise indefinitely without hurting demand.

Retail sales excluding vehicles dropped only 0.4%, after rising a revised 1.6% in June. A surge in spending at gasoline stations and solid gains in spending at restaurants and bars helped to offset weakness in nearly every other sector. The surge in spending at gasoline stations was almost completely due to the surge in gas prices, which ate into consumer budgets. Housing related spending at furniture and building material and garden centers continued to drop in July but remained well above year-ago levels. Speculators are crowding out first-time buyers in many markets.

We were seeing the pivot from goods into services continue in July, as consumers rushed to escape quarantines and see and be seen out and about. That said, spending on vacations crested in July at lower levels than we saw in 2019, before the onset of the pandemic. Everyone who wanted to travel couldn’t or wouldn’t in response to surge pricing and the pickup in infections in many vacation hot spots.

Core retail sales, which feed directly into the GDP data dropped by 1.1% during the month. Sales remained more than 10% ahead of a year ago. Apparel store sales are still running more than 40% above a year ago despite the ground lost in July. Online spending contracted 3.5% during the month. A shift in the timing of Amazon Prime Day from July to June pulled that spending ahead by one month and exacerbated the weakness we saw in July.

Traditional department stores fared worse than big-box discounters after regaining some ground in June. Spending at sporting goods stores continued to contract even as people returned to gyms; that may not last. We will see if it holds through the next few months. Many gyms are now requiring proof of vaccines to enter.

Much of the weakness we are seeing in retail occurred before the pullback related to the Delta variant. Consumer sentiment plummeted to the lowest level since the onset of the pandemic in early August; concerns about inflation and the spread of the more contagious variant were the biggest reasons for the drop. Areas hit hardest by the outbreak recorded the largest pullback in mobility during the first two weeks of August.

Look for additional weakness in August as back- to-school spending is offset by another slowdown in the service sector. Credit card data and reservations on OpenTable suggest that people stopped traveling and congregating as much in August.

The timing is particularly bad for the millions still out of work and scheduled to lose expansions and supplements to unemployment insurance on September 6. White-collar hiring looks like it accelerated at the end of July and early August, while hiring in the hardest hit leisure and hospitality sector most likely abated quite substantially. Cancellations on travel have picked up again.

Bottom Line
The shortfall in spending in July is likely a prelude to additional softness in spending during August and September. Some of that is the natural leveling off after a boom. We are still well above where we were a year ago. More moderation is likely. Without additional stimulus, we could see a larger toll on overall growth in the second half. Supply-chain disruptions have intensified, but we now expect inventories to rebuild a little faster than we did a month ago. Brace for a rockier second half.

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