Retail Sales Float On
The poet James Russell Lowell described June as the “high tide of the year.” The June retail report showed that the tide washed something ashore for everyone last month.
Those who cling to the idea that there’s a recession looming can point to the fact that retail sales grew by less than expected, rising just 0.2 percent versus expectations of 0.5 percent. There were also meaningful declines in sales at grocery stores, gas stations, and building supply centers.
Sales were down in the leisure category that includes sports stores, book stores, hobby stores, and music stores. But this is one of the smallest of the different types of retailers tracked by the Department of Commerce. Total sales in the category were just $8.5 billion versus $41.4 billion at building supply and garden centers.
Sales fell at department stores and the broader category of general merchandise stores, which provides fodder to the argument that households are turning off the spending spigots. The broader category declined by 0.1 percent to $72.3 billion.
Overheating or Soft-Landing?
Analysts who worry that the bigger risk to the economy is further overheating and a revival of inflationary pressures can point out that the decline in gas station sales is likely a reflection of lower prices in June rather than a fall in demand.
What’s more, there was a huge surge in sales by nonstore retailers—that is, online sales. These rose 1.9 percent for the month to $105.4 billion. The category was also revised up for the prior two months. After revisions, online sales rose at a seasonally adjusted annualized pace of 11 percent in the second quarter, which does not seem like an exhausted consumer story.
Also supporting the idea that the economy may still be more at risk of overheating than falling into recession was the beat in the “control” category that feeds into calculations of gross domestic product. This jumped 0.6 percent in June, more than expected. This is likely to raise estimates for second-quarter GDP, which were already running at levels inconsistent with a slumping economy. The Atlanta Fed’s GDP nowcast was raised to 2.4 percent on Tuesday from 2.3 percent last week.
The soft-landing folks also can find hooks on which to hang their hats. That boost in the control category? It was mostly online sales. Excluding online sales and autos, core control sales were down an annualized 1.4 percent in the second quarter.
Sales at bars and restaurants also appear to be cooling. These rose just 0.1 percent in June, a big slowdown in growth from earlier this year. That was lower than the 0.4 percent monthly increase in the consumer price index for food away from home, suggesting that there has been a pullback in dining out. Because restaurants and bars have been a major source of job growth, this could point to a slowdown in hiring and an easing of labor market tightness.
Some soft-landers noted that what seems to be happening is that retail sales are returning to something like a pre-COVID trend—lower than what we experienced as the economy snapped back from lockdowns while juiced up with stimulus but not in recession territory.
In our view, the report looks like a “push” when it comes to interest rates. The Federal Reserve is still likely to hike two more times this year.
Trading Home Improvement for Home Decorating
One thing we noticed in the retail sales report was that while spending at building supply and garden centers declined, spending at furniture stores was up sharply. Anecdotal evidence suggests to us that people locked into their homes because they have favorable legacy mortgage rates have been switching from home improvement to upgrading their furniture. The big boost in electronics and appliance store spending also supports this idea. If we’re not going anywhere, might as well buy some nicer stuff.
