Retail Sales Decline Again, Strengthening Argument for Rate Cut

Booming Consumer Fades: Retail Sales Data Shows a Spending Slowdown

May witnessed yet another lackluster month for consumer spending, as softening economic conditions took their toll on American households. The retail sales report for the month reveals a modest 0.1% increase, following a 0.2% decline in April. However, beneath this seemingly minor shift lie important trends that warrant attention.

Key Insights from the Retail Report

1. Mixed Results: Among the 13 tracked categories, five experienced declines. Factors such as cheaper gasoline and Memorial Day discounts at furniture outlets contributed to this mixed performance. The data underscores a broader slowdown in consumer spending—a trend economists attribute to persistent inflation, a cooling job market, and signs of financial stress.

2. A Tale of Two Consumers: Paul Ashworth of Capital Economics points out that slowing services consumption and plummeting consumer confidence suggest households are more affected by higher interest rates than previously assumed. However, Federal Reserve Chair Jerome Powell maintains that consumer spending remains solid, and households are in "pretty good shape."

3. Economic Indicators: Treasury yields dropped in response to the retail sales report, signaling economic softening. The so-called control-group sales, used to calculate GDP, rose 0.4% in May after a 0.5% drop in April. This has led to a revised, slower GDP growth forecast for Q2 by Morgan Stanley and Oxford Economics.

4. Goods vs. Services: Retail figures primarily reflect goods purchases, representing only a fraction of overall consumer spending. Notably, spending at restaurants and bars declined by 0.4%, marking the largest drop since January. This suggests that consumers are tightening their budgets.

In the bigger picture, lower-income consumers are cutting back on spending as their pandemic savings dwindle. Simultaneously, more people are missing credit card and car payments. While this slowdown may aid the Federal Reserve in curbing inflation, it also poses the risk of triggering a deeper, more challenging-to-reverse economic downturn.



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