The most recent monthly report on US retail sales showed something worrisome. In the month of May, headline sales tumbled by 0.9%, a drop off much greater than analysts expected. This August downturn is the lowest level of retail sales since January, causing major concern and panic amongst many economists and policymakers. Looking below the surface, the report notes alarming weaknesses in the manufacturing sector, as well as at vehicle sales, restaurants and bars, gas stations, and building materials.
The retail sales drop is significant not just because it’s bad news, but because it signals deeper economic stress. The news that consumers are pulling back from spending is potentially chilling foreshadowing for economic growth in the coming months. By all indications, the Federal Reserve needs to reevaluate its monetary policy in light of this data. Market expectations are strongly indicating that a rate cut will occur as soon as September.
Details of the Retail Sales Report
The May retail sales report came in much weaker than expected, with declines clearly outpacing increases on the commonly followed month-over-month basis. Vehicle sales were just about the largest factor in that overall downturn. Consumer behavior is shifting toward greater caution, with consumers more unwilling to make major purchases in light of economic uncertainty. Further, spending at restaurants and bars dropped precipitously as well, highlighting a major change in consumer behavior.
Gas station sales, which are often heavily impacted by changing fuel prices, added to the depressing effects on retail sales. That report pointed to a recent dip in building materials as a sign that construction-related spending has dried up. These declines all together and significant drops in spending overall reflect a wary consumer mood amid the pinch of higher prices and economic uncertainty.
Retail sales in general are down. Even their control group — less-volatile categories like Auto’s and Gas excluded — only rose a meager 0.4%. This figure exceeded the predicted increase of 0.3%, showing signs of resilience in core consumer spending. This divergence highlights that even when some sectors are struggling, others are likely supported by persistently strong demand.
Economic Implications
The meaning of this retail sales report is HUGE. The other shoe has finally dropped on import prices, coming in higher than expected, with the month-to-month rate going flat. Most importantly, import prices excluding petroleum rose slightly, 0.2%, suggesting the return of inflationary pressures that could make it all the more difficult to achieve strong economic recovery.
Export prices are weak, suggesting further global trade dampening effects from the U.S. This fall is mostly due to the impact of tariffs by the prior-administration under former President Trump. This change further reduces the competitiveness of US goods abroad, suppressing future trade balances and placing additional stress on import-export dynamics.
The US dollar index has begun to claw back on a few of the prior losses, demonstrating market responses to these new economic signals. Increasing US bond yields are a clear indication of investors’ futures rate expectations. The market is growing in confidence that we will see our first rate cut by the Federal Reserve in September. These influences will be very important in guiding both the conduct and communications of future monetary policies.
Market Reactions and Future Outlook
Market analysts are watching these moves with bated breath, as they try to determine what they mean for the long-term direction of the economy. We see this reflected in declining retail sales and increasing import prices, all signs that consumers are getting pinched. This political pressure will likely drive spending even lower over the next few months.
As the Federal Reserve considers how to respond to these troubling economic signals, policymakers are left with a concerning and complex landscape. Balancing competing inflationary pressures with a backdrop of slowing growth will take deft use of the monetary tool box and strategic thinking.