US retail sales saw a modest increase in June 2023, falling short of economists’ expectations. However, consumers continued to show resilience by maintaining or increasing spending in some sectors, indicating a solid growth trajectory for the economy in the second quarter of the year.
The mixed report from the Commerce Department on 18 July 2023 also pointed to a slowdown in the momentum of spending growth.
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But this did not alter the anticipated decision of the Federal Reserve to resume raising interest rates in July after keeping them unchanged in June.
The latest retail sales data indicates that factors intended to curtail consumer spending power, such as reductions in pandemic savings, high inflation and higher borrowing costs, have not significantly impeded consumption.
This resilience demonstrated by consumers suggests that the Federal Reserve’s tightening measures have not gone too far at this point. Will Compernolle, a macro strategist at FHN Financial in New York, told Reuters: “The resilient consumer shows the Fed has very little reason to think its tightening has gone too far at this point.”
May and June retail sales both rise
In June 2023, retail sales rose by 0.2%, and data for May was revised upward to show sales growth of 0.5% instead of the previously reported 0.3%.
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By GlobalDataEconomists surveyed by Reuters had anticipated a higher increase of 0.5% for June. It is important to note that retail sales primarily include goods and are not adjusted for inflation.
On a year-on-year basis, retail sales in June grew by 1.5%.
Despite the Federal Reserve’s implementation of 500 basis points worth of interest rate hikes since March 2022, consumer spending has remained robust.
The tight labour market has continued to drive wage gains, while some households still possess savings accumulated during the Covid-19 pandemic.
As inflation subsides, consumers’ purchasing power is gradually increasing.
Retail sales highlights: auto sales divergence and online surges
Sales at auto dealerships increased by 0.3% in June 2023, despite motor vehicle manufacturers reporting an acceleration in unit sales during the same month. Auto sales had surged by 1.5% in May.
The divergence between unit sales reported by manufacturers and the retail sales data is partly attributed to a shift in vehicle sales from consumers to businesses as the industry normalises after pandemic-related disruptions.
Online sales experienced a significant surge of 1.9%, marking the highest increase in six months. This trend is expected to continue, especially after the record-breaking Prime Day promotion hosted by Amazon in July.
Sales grow in furniture, electronics and clothing
Receipts at furniture stores increased by 1.4%, while sales at electronics and appliance stores advanced by 1.1%. Clothing store sales also saw a rise of 0.6% in June.
However, sales of building materials and garden equipment supplies declined by 1.2%. Consumers also reduced spending on sporting goods, hobbies, books and musical instruments.
Grocery store sales declined, as did receipts at department stores. Sales at service stations saw a significant drop of 1.4% due to lower gasoline prices.
Core retail sales show strength
Excluding automobiles, gasoline, building materials and food services, core retail sales increased by 0.6% in June. The data for May was revised slightly higher, showing core retail sales growth of 0.3% compared to the previously reported 0.2%. Core retail sales are closely associated with consumer spending, which accounts for over two-thirds of the US economy.
June’s solid rise and the upward revision in May suggest that consumer spending continued to grow, albeit at a slower pace than in the first quarter of 2023, which witnessed the fastest rate of growth in nearly two years.
Manufacturers struggle, service industries thrive
While consumers display resilience, manufacturers face challenges due to higher interest rates.
A separate report from the Federal Reserve revealed a 0.3% decline in manufacturing output in June, following a 0.2% decrease in May.
However, the weakness in manufacturing is primarily limited to goods production, with service-related industries such as travel continuing to expand.
Steady growth and lack of overheating
Economists at Bank of America Securities have raised their estimate for second-quarter GDP growth in 2023 to a 1.7% annualised rate from the previous projection of 1.5%. The economy had grown at 2.0% in the January to March quarter of the year.
The steady growth and lack of overheating in the economy provide positive news for investors concerned about the need for the Federal Reserve to impose rate rises.
