Retail Sales Flattened in July

July retail sales were unchanged over June, missing expectations for a +0.1% increase.  June retail sales were revised lower to +0.8% from the originally reported increase of +1.0%.  

Gasoline station sales saw the largest drop in July, -1.8% m/m, on account of falling gasoline prices.  The next largest decline was recorded for motor vehicle sales and parts, -1.6%.  Given that vehicle purchases represent a big-ticket item for consumers, higher financing costs due to rising interest rates look to be having an impact.  According to Kelley Blue Book, the price for a new vehicle is more than $47,000 and the average monthly vehicle payment is more than $650 per month, according to Edmunds, which are sizable amounts.

It is important to remember that retail sales data is reported on a nominal basis.  The higher prices for items can influence the total aggregated figure higher even when volumes are falling, providing a false sense that things may be improving.  In other words, retail sales in the current environment might be more reflective of the higher prices that consumers are paying and not necessarily that they are buying more items.  Indeed, the latest second quarter financial statements from large retailers showed that consumers are spending more, but receiving less.  Company earnings reports indicated that dollar sales rose due to higher prices.  When adjusted for inflation, retail sales on a real basis have been negative in two of the last three months, exhibiting the corrosive effects of higher inflation.  

Clothing store sales declined by 0.6% in July.  We have heard of expectations of higher back-to-school shopping as schools return to in-person instruction but this did not materialize in apparel sales last month.  

Both general merchandise store and department store sales fell for the second straight month, a sign that inflation is discouraging discretionary purchases.  

Even sales at eating and drinking establishments slumped in July, eking out a 0.1% increase after robust gains in recent months—a sign that social activities are also being impaired by rising inflation.  

However, the July report was not entirely negative.  Building material store sales jumped by 1.5% and furniture store sales rose by 0.2%.  But as my colleague Yelena Maleyev points out, the housing sector is losing ground as interest rates climb.  We suspect that big-ticket purchases tied to housing, such as materials, garden equipment and all the goods and furnishings associated with it, will not be sustainable going forward as we saw in July.  

Other positive notes in the July report included online sales, +2.7%.  And excluding the negative impacts of autos and gas, July retail sales rose by 0.7%.  

Bottom Line

As we noted in our “Special Annual Outlook Edition,” the ongoing drawdown in the savings amassed during quarantines, high inflation, rising interest rates and an expected increase in unemployment suggests that consumer spending will be weak as we move into 2023.  Despite the upward pop in the July jobs report, in which 528,000 new jobs were created, it is unrealistic to suspect this type of strength can be sustained going forward, particularly with both monetary and fiscal policy now being restrictive.  Core retail sales rose by 0.8% in July, which is an input into GDP.  As a result, third quarter real GDP is tracking at just under a 1% seasonally adjusted annual rate, which isn’t a whole lot to cushion the economy from unexpected internal or external shocks.