US June retail sales numbers show consumer spending continuing to weaken

A mixed picture of consumer spending in today’s US retail sales report for June, showing overall sales slipping by less than widely expected but with sizeable pullbacks seen in spending in the vehicle and auto gas sectors. And within the numbers, a picture is emerging of consumers increasingly gearing spending towards the goods sector, seeking out discounted products as they seek to make their incomes stretch further, while becoming increasingly reluctant to spend on discretionary services such as restaurants, in the way they did last year.

The headline measure of sales remained unchanged at 0.0%, against expectations for a fall of -0.3%; the May reading was revised upwards by 0.2%. The better number was driven by an unexpected 1.9% increase in non-store sales, the cause of which is hard to pinpoint exactly. But elsewhere, reported upticks in sales of gardening equipment, clothing and building materials were likely the result of the higher temperatures experienced over the month, the second hottest June recorded since records began in 1895. But outside of these categories, general merchandise sales rose by just 0.4% and food services by 0.3%, pointing to a more fragile underlying strength of demand.

This weakening pace of consumption growth has been a feature of 2024, with households cutting back on expenditure as real incomes grow much more slowly compared to last year, and it is a further sign too that the US economy is gradually cooling, given that US private consumption accounts for around 68% of total GDP. The net upwards revisions to the May numbers and the better-than-expected readings today, suggest that overall sales in Q2 will be stronger than the Q1 figure of 1.5%, probably likely to print closer to the 2% mark. But this will sbe someway short of the 2.7% average pace of growth seen over 2023.

And looking ahead, the outlook for consumption looks increasingly difficult. With the labour market expected to continue to soften, dragging down wages growth in the process, the excess savings stocks enjoyed by most households post-pandemic now largely exhausted, and consumer confidence remaining low, it is hard to see reasons for suggesting that consumers are going to increase spending going forward. And in the meantime, high nominal interest rates - and an ever-increasing real rate of interest - is making credit card lending prohibitively expensive, while at the same time weighing on housing market activity and the housing-related retail sales it naturally generates. The one bright spot at the moment is that, excluding auto sales and gas sales, retail sales rose by 0.8% overall in June, suggesting this decline in spending will be gradual.

Overall, therefore, Q2 looks like being the peak period for consumption this year, with activity over Q3 and Q4 on course to steadily weaken towards the 1.0% level. It is a picture that should do nothing to dissuade the Fed that interest rates can start to be cut.