Shoppers walk inside the King of Prussia mall, in King of Prussia, Pa.RACHEL WISNIEWSKI/Reuters
U.S. retail sales barely rose in May and data for the prior month was revised considerably lower, suggesting that economic activity remained lacklustre in the second quarter.
The smaller-than-expected increase in retail sales reported by the Commerce Department on Tuesday, however, likely exaggerates the slowdown in consumer spending. Part of the decline in sales was because of lower gasoline prices, which weighed on receipts at service stations.
Nonetheless, inflation and higher interest rates are testing the resilience of consumers, with households generally prioritizing essentials and cutting back on discretionary spending. Tepid retail sales bolstered economists’ expectations that the Federal Reserve could still start cutting interest rates in September. U.S. central bank officials last week saw the anticipated rate cut delayed to perhaps as late as December.
“Maybe households aren’t quite as impervious to higher interest rates as we were beginning to believe,” said Paul Ashworth, chief North America economist at Capital Economics. “Admittedly, we don’t expect a full-blown slump in consumption but, at the margin, even a modest slowdown in consumption growth and consequently GDP growth too could be enough to tip a finely balanced Fed in favour of a rate cut in September.”
Retail sales rose 0.1 per cent last month after a downwardly revised 0.2 per cent drop in April, the Commerce Department’s Census Bureau said. Retail sales were previously reported to have been unchanged in April. Economists polled by Reuters had forecast retail sales, which are mostly goods and are not adjusted for inflation, gaining 0.3 per cent in May.
Data for March was revised slightly lower. With price pressures moderating in May, economists estimated that inflation-adjusted retail sales rose 0.4 per cent last month after declining 0.3 per cent in April.
Retail sales have in recent months been distorted by an early Easter. Stripping out the volatility, the trend in sales growth has been slowing also as banks are tightening access to credit against the backdrop of lower-income borrowers increasingly struggling to keep up with their loan payments.
Though the labour market remains on a solid footing, it is becoming a bit difficult for people who lose their jobs to quickly find new work and wage increases are moderating.
Savings have also been whittled down. Still, the pace of spending is likely sufficient to sustain the economic expansion.
The Fed last week kept its benchmark overnight interest rate in the 5.25 per cent-5.50 per cent range, where it has been since last July. Policy-makers projected only a single quarter-percentage-point reduction for this year. They, however, maintained their gross domestic product growth estimates.
Financial markets remain confident that the Fed’s will start its easing cycle in September. Stocks on Wall Street were trading higher. The dollar slipped against a basket of currencies. U.S. Treasury yields fell.
The retail sales picture was mixed last month, with some areas of strength. Sales at gasoline stations dropped 2.2 per cent, reflecting lower prices at the pump. Building material and garden equipment store sales sagged 0.8 per cent.
Sales at food services and drinking places, the only services component in the report, slipped 0.4 per cent. That was the biggest drop since January and followed a 0.4 per cent advance in April. Economists view dining out as a key indicator of household finances. Food services and drinking places sales have dropped in three of the last five months.
“This category more broadly has been losing momentum as households pull back discretionary spending and move back toward eating at home,” said Ellen Zentner, chief U.S. economist at Morgan Stanley.
Furniture store sales fell 1.1 per cent. But receipts at motor vehicles and parts dealers rose 0.8 per cent. Online store sales increased 0.8 per cent, partially recouping the 1.8-per-cent decline in April. Sales at sporting goods, hobby, musical instrument and book stores increased 2.8 per cent last month.
Receipts at electronics and appliance outlets gained 0.4 per cent, while those at clothing retailers increased 0.9 per cent.
Retail sales excluding automobiles, gasoline, building materials and food services rose 0.4 per cent last month after a downwardly revised 0.5 per cent drop in April.
These so-called core retail sales were previously reported to have dropped 0.3 per cent in April. Core retail sales correspond most closely with the consumer spending component of GDP. The downward revision to April’s core retail sales pointed to moderate consumer spending in the second quarter. That prompted economists at Goldman Sachs to trim their GDP growth estimates for the quarter to a 2.0 per cent annualized rate from a 2.1 per cent.
The economy grew at a 1.3-per-cent pace in the first quarter.
There was some encouraging news on manufacturing, where a revival appears to be under way. The sustainability of the recovery, however, depends on how long borrowing costs stay at current levels as well as how much consumer spending slows.
Manufacturing output jumped 0.9 per cent in May following a downwardly revised 0.4-per-cent drop in April, the Fed said in a separate report on Tuesday.
Economists had forecast factory production rebounding 0.3 per cent after a previously reported 0.3 per cent fall in April. Production at factories gained 0.1 per cent year-on-year in May.
The increase in output in the sector, which accounts for 10.4 per cent of the economy, was across the board. Durable goods manufacturing production increased 0.6 per cent, while nondurable manufacturing production shot up 1.1 per cent.
“Growth in manufacturing output looks set to be incremental in the second half of this year, and output likely will take until deep into 2025 to return sustainably to its 2022 level,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “High interest rates and waning pricing power will limit growth in business investment, while the relatively high level of the U.S. dollar will dampen external demand for manufactured goods.”