A Tale of Two Consumers

Retail sales rose 0.5% in March after another upwardly revised 0.8% in February. A 1.2% drop in vehicle sales, which are still in short supply, took a toll on overall gains. Dealers are still complaining that demand is outstripping supply, although the upward pressure on prices has abated from last fall. Sales excluding motor vehicles and parts rose 1.1% during the month, a few tenths of a percent slower than overall inflation.

Gasoline station sales were a driver of non vehicle spending with a jump of 8.9% for the month. That actually represents a drop after adjusting for the 19.8% surge in price at the gas pump last month. That is the strongest month for gasoline station sales since March 2021, also a period of surging gas prices - although back then, they were rising from pandemic induced lows and not crimped consumer wallets as they are today.

Spending at building material and garden stores continued to slow a bit during the month. Google searches for do-it-yourself projects have dropped with the surge in mortgage rates and fall in mortgage refinancing we have seen since the start of the year.

Core retail sales, which feed directly into the calculation of GDP growth, were essentially flat for the month. Strong gains in spending on restaurants and bars, clothing, appliances and big-box discounters offset a sharp 6.4% decline on spending online. That is the third drop in online spending in four months. Appliances delayed due to backlogs are coming in faster than vehicles and furniture, although another round of supply chain disruptions is emerging with new, harsher lockdowns in China.

Spending at the grocery store rebounded in March after falling in February. Consumers were forced to cut back on their spending at grocery stores after adjusting for inflation. This and a sharp pivot back to big-box discounters from more traditional department stores, which lost ground during the month, reveals the lengths that some low- and middle-income households are going to stretch their budgets in the face of higher inflation. Spending at health and personal care stores also suffered. Part of that is due to the slowdown in the pace of COVID infections; another part reflects higher prices at the gas pump.

The data for personal consumption expenditures, which will be released later this month and includes more spending on services, is expected to come in much stronger for March. Consumers are finally catching up on everything from vacations to elective surgeries postponed during the crisis. Wedding venues are also booked solid; wedding planners are expecting the strongest year since 1984.

Separately, jobless claims came in at 185,000 for the week ending April 9. That is slightly more than expected but still extremely low and consistent with robust job gains in early April. This week is the week that the survey for the employment report is taken. We need to see a fairly sharp slowdown in hiring for the Federal Reserve to feel more comfortable about inflation risks. Members of the Federal Open Market Committee (FOMC) would like to see job postings return to the 1:1 ratio we saw in February 2020; there were 1.8 job openings per active job seeker in February this year.

Bottom Line
Consumers powered through the first quarter and kept spending despite the surge in inflation. Cracks in the foundation of spending are beginning to show with some rationing of gas and the pivot back to discount stores. The savings that consumers amassed during the pandemic is beginning to be drained.

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