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Retail sales were flat in June, but the report’s details showed underlying strength. All of the softness was due to a big drop in motor vehicle and gasoline sales. Core sales (which exclude cars, gas and food services) rose a strong 0.9%. E-commerce sales were up 1.9% ahead of Amazon’s Prime Days sale this month. In-store sales benefited as well, rising by 0.5%.
Motor vehicle sales dropped 2.0% in June, but that is likely related to computer hacking problems at dealers nationwide. Once those issues are resolved, sales should bounce back for the most part. However, demand is not as red-hot as it used to be, as dealer inventories have largely been restored to normal levels. Nominal gasoline sales were down because of lower gas prices. Restaurant sales kept plugging away, with a 0.3% increase. Sales related to home purchases and improvements, such as building materials, furniture and home furnishings, will likely continue to be slow, reflecting the impact that higher interest rates have had on the housing market in general.
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Consumer spending on services excluding restaurants rose a decent 0.3% in May, the latest month for which data are available, following a moderate 0.4% rise in April. While spending on services is still rising at a good pace, it is far below the strong average monthly increases of 0.7% in the previous seven months. Services spending should be rising strongly since consumers have cut back on goods spending after splurging during the pandemic. Moderate growth in services now indicates a slowing in overall consumer spending, despite the strong June retail sales. Slower consumer spending will be a major factor in slower GDP growth in the second quarter and the rest of this year.
A gradually cooling labor market is likely causing consumers to think about increasing their savings. Saving rates have been much lower than their historical norms and may begin to rise slowly, cutting into the cash available to support future retail spending. Higher interest rates on consumer loans may weaken some households’ spending power, too.
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