US retail sales are carried by services but will slow as jobs market tightens

US retail sales data

In June, US retail sales increased by only 0.2%, falling below the consensus prediction of 0.5%. This disappointing result was driven by a decrease in gasoline sales, building materials, and restaurant spending. However, the previous month’s data was adjusted upwards by 0.2 percentage points to 0.5%.

June’s spending was bolstered in other sectors due to a strong labor market. The control group of sales, which impacts non-auto goods consumption in GDP directly, rose by 0.6%, exceeding the consensus prediction of 0.3%. This included a significant 1.9% rise in online spending after a decline in May.

“Today’s release left control group sales up by 2.1% annualized over the second quarter, less
than half the pace seen in Q1, and suggesting that goods consumption will be a modest negative for GDP in Q2, leaving
services as the driver of consumption,” writes CIBC in the review of the report. “A slowdown in the labor market ahead should work to limit retail sales in
discretionary categories further from here, in combination with the depletion of pandemic-accumulated excess savings,
which will be key to stalling growth in the quarters ahead in order to get inflation back to target.”

Mixed trends were observed in discretionary categories such as clothing, electronics, furniture, and online shopping which increased, while sporting goods, department stores, and building materials decreased.

CIBC notes that despite these fluctuations, the rise in the control group signals a respectable increase in non-auto goods consumption.

However, the quarter was weak overall, with demand largely aimed at services. The decrease in restaurant sales coincided with a slowing of restaurant prices. Unexpectedly, grocery store sales fell sharply even though prices remained stable.

CIBC says report keeps the Fed on track for hikes in July and September before a loosening jobs market bites.

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