June Retail Sales, May Inventories

Summer Slump Saps Spending, Consumer Caution Cooled Q2

  • June Retail Sales decreased by 0.5 percent, the third consecutive monthly decline.
  • Ex-auto Retail Sales decreased by 0.4 percent as gasoline prices fell.
  • Business inventories for May fell by 0.1 percent, matching the April decline.

U.S. retail sales fell for the third consecutive month in June, the first time that has happened since late 2008. This is a definite warning sign that the economy has lost steam, but it is not sufficient, by itself, to raise the recession flag. A mitigating factor in the three-month decline in retail sales is the fact that gasoline prices fell significantly from April through June and that was a major drag on gasoline station sales. Net of gasoline stations, retail sales fell in April and June, but not in May. Despite the fact that unit auto sales increased from a 13.7 million unit rate in May to 14.1 in June, retail sales of motor vehicles and parts fell by 0.6 percent in June.  Retail sales excluding autos fell by 0.4 percent in June. Gasoline station sales were down 1.8 percent as the average price for unleaded gasoline fell from $3.73/gallon in May to $3.52. July average unleaded gasoline prices are down in the low $3.40s so we will probably see another drag from gasoline in the July retail sales data. Other losers were building materials, down 1.6 percent in June, and sporting goods, also down 1.6 percent.  Other major categories were weak, indicating broad-based caution on the part of consumers. A combination of faltering consumer confidence, weak job growth and perhaps a very rational increase in the saving rate in anticipation of the 2013 fiscal cliff has put consumers back on their heels.  With two-thirds of U.S. economic activity in the hands, and wallets, of consumers, the Q2 spending slump is a strong warning signal that the U.S. economy has lost momentum. Still, even with the slump in retail sales, total real (price adjusted) consumer expenditures for the second quarter are expected to show a weak increase, supported by non-retail sales (services). With slightly declining durable goods sales, flat nondurable goods sales, moderately increasing services sales, real consumer spending for Q2 could show an annualized gain of about 1.0 percent. This could easily drop Q2 real GDP growth down to the range of 1.0 to 1.5 percent. At that weak growth rate, productivity gains can outpace output growth, weighing on job creation, and putting the economy back into “stall speed”, increasing the vulnerability to other economic drags including the recession in Europe, weaker growth in Asia and the upcoming U.S. fiscal cliff.

Just as lower gasoline prices are a drag on retail sales, lower energy prices are also a drag on inventories. Nominal business inventories declined by 0.1 percent in May after a similar loss in April. Weak real inventory accumulation is yet another downside risk for Q2 real GDP growth. The advance estimate for Q2 real GDP growth is due out on Friday, July 27.

Market Reaction: Equity markets opened with losses. Treasury yields are down. NYMEX crude oil is up to $87.23/barrel. The dollar is down against the yen and up versus the euro.

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