US retail sales figures continue to show consumption weakening

A disappointing set of retail sales numbers from the US, with the hoped-for recovery in the numbers this month not materializing. Today's reading for May showed the headline monthly reading increasing by just 0.1% and leaving the picture for consumer spending actually worsening, given the sizeable downwards revisions made to last month's numbers. In nominal terms, the May numbers are virtually unchanged from December’s report, a picture that is clearly consistent with households being forced to tighten their belts as the slowdown in real income growth being seen this year, alongside the near-exhaustion of post-pandemic excess savings and deteriorating consumer confidence, increasingly weigh on consumption. It may have come later than initially expected, but the tight financial conditions engineered by the Fed finally appear to be straining household budgets.

Within the figures themselves, a modest decline in petrol prices have acted to dampen down the numbers, while housing related spending remains particularly weak, with sales of building materials and furniture & home furnishings down 0.8% and 1.1% respectively on the month, a lagged effect from the fall seen in US homes sales and something that is unlikely to bounce back any time soon. Separately, spending on food services has now fallen by 1.0% ytd, a clear sign that household budgets are under pressure.

Going forward, the outlook does not look particularly promising either, with the q/q annualised rate of growth in real consumption looking set to slow. From an average quarterly increase of 2.7% seen in 2023, unchanged spending patterns in June will leave the annualised Q2 growth rate at only 1.9%, a tad shy of the 2.0% figure recorded over Q1. And with the labour market expected to increasingly weaken going forward, in turn bearing down ever more heavily on wages growth, so the outlook for consumption looks set to weaken further. Consumer spending is clearly going to be materially softer this year than last, with the spurt in sales seen in February fading rapidly.

But it is not all bad news. The bigger picture is that the Fed will privately welcome a softer pace of consumption, as it makes the task of returning CPI back to target that much easier, given the key role domestic consumption plays in driving US economic activity. As such, today’s report actually makes the case for an interest rate cut being delivered this year that little bit stronger, a fact that the markets are already reflecting with the chance of a rate cut being delivered in November increasing from being viewed as a near-certainty (99% chance ahead of the numbers) to a certainty now (110% chance). Indeed, with the evidence increasingly growing of a slowing US economy, we still anticipate the Fed being forced to cut interest rates more than once this year and continue to see a strong possibility of rates being cut in September.