Spending at US retailers rose for the third consecutive month in June, indicating a modest display of resilience from American consumers, according to the Commerce Department. Retail spending, adjusted for seasonality but not inflation, increased by 0.2% in June. However, this was a slower pace compared to the previous month’s revised 0.5% increase and fell below economists’ expectations of a 0.5% gain. While furniture sales saw a 1.4% jump, spending at department stores fell by 2.4% during the same period. Excluding sales at gasoline stations and on cars and parts, retail sales rose by 0.3% in June compared to May. Overall, retail sales rose by 1.5% in June compared to the previous year, which is the second-weakest pace since May 2020.
The report suggests that US consumers are still spending amid higher interest rates, persistent inflation, and ongoing economic uncertainty. However, the pace of spending remains slow. Analysts from Pantheon Macroeconomics noted that consumers’ spending is being affected by the depletion of excess savings accumulated during the COVID-19 pandemic. They estimate that the rate at which savings are being spent has slowed to $70 billion per month in May, compared to a peak of $90 billion last summer. Moreover, the resumption of student loan repayments in September is expected to further impact consumer spending.
Retail sales play a crucial role in determining overall consumer spending, which accounts for approximately two-thirds of economic output. Although consumer spending likely held up in the second quarter, it is expected to have slowed down compared to the first three months of the year.
The state of the labor market significantly influences spending figures, and recent months have seen a gradual cooling. In June, employers added 209,000 jobs, nearly 100,000 positions below the robust showing of 306,000 in May. The month’s job gain was the lowest since December 2020. The job market, however, remains strong by historical standards. Continued hiring and wage growth are expected to support consumer spending.
The Federal Reserve has been taking steps to cool the economy and combat inflation. Therefore, the steady slowdown in spending is likely viewed favorably by officials as long as it persists. Economists anticipate that consumer spending will continue to decline due to inflation and the Federal Reserve’s tightening cycle. The moderation in employment and household income growth in the second half of the year, coupled with shrinking excess savings, the restart of student loan repayments, and tightening credit conditions, are expected to further contribute to the slowdown in consumer spending.
Later this month, the Federal Reserve officials will meet to discuss their latest monetary policy decision. A quarter-point interest rate hike is widely expected, and officials have indicated that there may be another hike this year. Some officials believe that getting the second hike done in September would be advisable.
A persistently strong economy and a robust labor market would be concerning for Federal Reserve officials. However, the difficult economic landscape anticipated later this year might prompt US consumers to significantly cut back on their spending.
The Commerce Department is set to release its first estimate of second-quarter gross domestic product on July 27.