US June retail sales figures present a mixed picture of consumer spending

A somewhat mixed picture from the US retail sales numbers today. The June headline and core readings both undershot expectations but these falls were largely offset by upwards revisions made to the May numbers. But the key message to take away from the figures is that real consumer spending is weakening, rising in Q2 at an annualised rate of approximately 1%, a substantial fall from the 4.2% surge seen in Q1. Of course, the jump in spending at the start of the year was boosted by the unseasonably warm winter weather seen over large parts of the US and the sizeable one-time uplift made to social security payments, both of which combined to temporarily boost spending above trend. But the broader picture is that spending has slowed down significantly as the Fed has tightened monetary policy. And with further increases in interest rates almost certain to come, and the full impact of the tightening delivered so far yet to be fully felt, it is hard to foresee anything other spending continuing to remain under pressure going forward.

Breaking down the data, the minor 0.1% increase recorded for food service sales is broadly in line with OpenTable data which has been suggesting for a few months now that spending in restaurants is no longer increasing but is instead showing flat growth. More worryingly, the collapse in home sales seen last year is now playing out in the 1.2% drop recorded in building equipment and supplies, while sales of home furnishings, posting a 1.4% rise, can be expected to start heading lower in the near future too. General merchandise sales were also shown to be weakening, very much mirroring the picture being described by the Redbook chain store numbers. The main boost to the figures came from online sales, which jumped 1.9%. But standing out against the backdrop of an otherwise downbeat report, it remains to be seen whether or not this increase will ultimately turn out to be just one month’s noise.

What is undeniable is that a major factor behind this slowdown in consumer spending is likely the result of US consumers no longer being able to draw down on the excess savings stocks they had been relying on last year to maintain consumption patterns in the face of the rising costs of living. The overall excess savings stock has now been largely whittled down to its long run average level, suggesting there is little scope for it to be run down any further. And as the cost of dissaving rises and job prospects start to become less certain, so households may actually choose to begin increasing precautionary savings balances once again.

Overall, the take-away message from today’s report is that in an economy where domestic consumption accounts for some 70% of domestic GDP, there is nothing to assuage fears that the Fed’s policy actions will not yet engineer a hard landing.