Retail: Consumers Pulling Back, or Just Shifting to Services?

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Excluding the volatile motor vehicle and gasoline components, retail sales were flat in May after good growth in April. Considering the large rise in prices in May, inflation-adjusted sales were likely down. But there is the problem of how to interpret this downbeat data: Are consumers pulling back their spending in reaction to growing economic uncertainty, or are they just switching their spending to services instead of goods, as has long been expected? Perhaps it is a little of both, but the question won’t be settled until the Bureau of Economic Analysis publishes its data on consumer spending on services for May on June 30.

Department stores did well in May, but other than that, there was plenty of weakness to go around the retail sector. Motor vehicle sales dropped 3.5%, though car sales have been showing a saw-tooth pattern recently. Home furnishings and electronics showed large declines, along with e-commerce. It has been expected that e-commerce sales would pull back from their lofty levels as the economy normalizes thanks to the easing of the pandemic.

Restaurant sales were flat after adjusting for price increases, but that follows three large monthly jumps in a row. The return to more-normal patterns of dining out after the pandemic should continue to boost sales, though higher food and labor costs are forcing restaurants to raise their prices. This will likely be a drag on their sales at some point.