Is the Retail Sales Rebound in June Sustainable?

Scott Anderson
Chief Economist
Bank of the West

In a week that was chock-full of disappointing economic data, the resilient consumer rode to the rescue again. Overall retail sales rose a slightly better-than-forecast 1.0% in June after contracting by a downwardly-revised 0.1% in May, suggesting consumers are not yet deterred by soaring inflation, higher interest rates, and sliding equity prices.

The acceleration in retail sales growth last month breaks a string of four consecutive months of slowing sale growth. Moreover, retail sales growth was broad-based last month with 9 of 13 categories showing an increase, led by gasoline stations (+3.6%), nonstore retailers (+2.2%) and furniture stores (+1.4%).

Most Retail Sales Categories Expanded in June

The biggest sales declines in June were in building materials (-0.9% and might reflect the slowdown underway in the U.S. housing market), clothing stores (-0.4%) and health stores (-0.1%). On a brighter note, it was encouraging to see solid increases in some of the more discretionary categories, including restaurants and bars (+1.0% in the only services category in the report), sporting goods stores (+0.8%) and electronics stores (+0.4%).

The better-than-expected monthly growth drove the year-on-year retail sales growth rate up to 8.4% from 8.2% in May.

Annual Growth in Overall Retail Sales Accelerated in June

From a year ago, sales growth was also broad-based across most retail categories in June. The biggest increases were seen in gasoline stations (+49.1%, mainly due to the nearly 61% rise in gasoline prices over the same period), restaurants and bars (+15.1%) and nonstore retailers (+9.6%). The only notable decline was in sales at electronics stores which fell 9.1%.

Annual Growth Was Positive in Most Categories in June

There was more mixed news on the outlook for consumer spending in the latest consumer sentiment report. The University of Michigan's consumer sentiment index registered a preliminary reading of 51.1 in July, bucking expectations for an unchanged reading of 50.0. The first improvement consumer sentiment since April was driven solely by an increase in the current conditions index which rose to 57.1 from 53.8. The expectations index dropped to 47.3 from 47.5 and has declined for three months in a row, suggesting consumers are less optimistic about the future than the present.

Consumer Sentiment Rebounded Slightly in July

The details of the report were more encouraging. Buying intentions increased across the board with more consumers saying now is a good time to buy a major household item, including a motor vehicle and a house. This the first time the good time to buy a house index increased since December 2021. While one month does not constitute a trend, the rebound in buying intentions in July, if sustained, would be supportive of continued consumer spending growth over the near term.

The report also contained a hint of optimism that inflation may be peaking. One-year ahead inflation expectations fell to 5.2% and have dropped for two consecutive months. The drop was reinforced by the decline in five-year ahead expectations which fell sharply to 2.8% from 3.1% in June. This development will be well received by Fed officials who were increasingly worried that consumer inflation expectations were becoming unanchored.

The Outlook for Consumer Spending

Despite the solid rebound in overall retail sales in June and the slight improvements in consumer sentiment and buying intentions in July, our forecast is for real consumer spending to drop to just 2.4% this year – down from an unsustainable pace of 7.9% in 2021, but nonetheless a solid number historically speaking. Growth will then slow sharply to 1.2% in 2023 on higher interest rates, slower job growth and a rising jobless rate, before improving in 2024.

Real Consumer Spending Growth To Slow Sharply

This outlook implies the Fed will be successful in tempering consumer demand enough to eventually achieve its primary goal of reducing consumer inflation. The question remains, however, if the Fed will be able to engineer a "softish" landing, or if the economy will have to be tipped into a labor market recession to achieve that goal.

To learn more, check out this week's U.S. Outlook Report.


[Contributors Section]