Kiplinger Retail Outlook: Is This Consumers’ Last Hurrah?

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Total retail sales (excluding restaurants) rose a strong 0.6% in August, the third consecutive month of robust sales gains. Core retail sales (which also exclude gas and car purchases) also rose a strong 0.7%, but that was mostly the result of a 2.0% surge in e-commerce sales, since in-store sales edged up only 0.1%. Motor vehicle sales continued their bounce from a severe drop in May, rebounding close to their peak pretariff level of March and April. However, there are indications that these sales are slowing now. Clothing and sporting goods sales continued to show strength. But because the sales report is not inflation-adjusted, increases in tariff-affected categories are partly illusory.

Restaurant sales continued their seesaw pattern of a strong gain after a flat month, rising 0.7% in August. Spending on eating out is an important signal as to whether consumers feel flush or constrained, so the upward trend in this category shows consumers are not tapped out yet. Spending on services excluding dining rose 0.5% in July, the strongest growth this year. (July is the latest month for which services spending data other than dining are available. Data for other services in August will be published at the end of September.)

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The strong consumer spending growth is not likely to last, because there are too many headwinds. Consumer sentiment measures appear to be softening, again. First, the hiring slowdown in the labor market is creating job anxiety, even among those who are already employed. Households tend to cut spending and add to savings when the possibility of losing a job looms. If the unemployment rate or initial claims for unemployment rise, that fear will intensify. Second, price increases caused by tariffs are starting to show up among home furnishings and other imported goods in the Consumer Price Index. Price increases could become more prevalent as inventories of goods that were stockpiled ahead of the tariffs start to run down, and merchants begin passing on the cost of tariffs on recently imported goods. Consumers should pull back on purchases of imports as this happens.

There will be one tailwind, though: Stock-market capital gains distributions are likely to be strong at the end of the year, so there could be a spending bump among wealthier households when this happens. Motor vehicle purchases may get a boost, for example.

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