Retail Sales: Consumer Fabric Softening?

We look at soft retail sales numbers that reflect a consumer that could finally be slowing down, giving some small caliber ammo to UST bulls.

Jun 18, 2024

I'll drop the plastic, I'll drop it not..

Headline retail sales came in weaker than expected in May even with a low bar to clear off an April revised downward. Consecutive downwards revisions to March numbers, even if small, start the conversation around consumer weakness.
Lower gas prices in May are reflected in the print but price relief at the pump did not see consumers reallocating budgets elsewhere. Discretionary line items like Restaurants and Bars notched another down month in 2024 after a stellar run-up in the post reopening world.
This month’s print adds on to the growing number of consumer metrics that are coming up softer as rampant spending and a prolonged inflationary environment are beginning to weigh on wallets.

Retail Sales this month came in just barely positive but below consensus as consecutive months of downwards revisions add up to dampening views on the health of the consumer. The UST saw a mini-rally with the 10Y UST at -5 bps as we go to print and the 2Y UST also at -5 bps lower.

The May Retail Sales numbers add to a negative April print and a plunge in consumer sentiment readings (See Consumer Sentiment: Summer Blues or Election Vibecession? 6-14-24) that reflect consumers that are starting to tighten the purse strings. The slowdown is happening as consumers are decidedly more bearish on the current economic situation, which has generally remained resilient in the higher rate environment when one looks at jobs and wages even if spending is fading of late.

As this is still only a second consecutive month, we are not sounding cyclical alarm bells yet but there are clear signs that the consumer is starting to question spending that marginal dollar. Many companies are coming back to Econ 101 topics like price elasticity after a period where perpetual price increases were an easy driver for top line growth.

Even with signs of a slowdown, recent employment numbers still show a healthy jobs market with high wage inflation (See Payroll May 2024: The Wave Continues 6-7-24) and we maintain that it is hard to crack the consumer without a spike in unemployment. The core retail number at 0.4% this month reflects some recovery from the April dip and headline was still positive back towards the record highs of March.

The above chart gets into the weeds of the May release for a better view of the moving parts. The -2.2% Gas Stations line item is hard to ignore as a major driver for the depressed headline retail sales as gas prices were down in May. We might have anticipated a stronger consumer to redirect those dollars elsewhere like food services, but that line is also down in further evidence of a consumer that is pulling back.

Moving down below to the core retail components, we generally see small positive increases. We had attributed some of the slowdown in the April to the Nonstore Retailers line (i.e. online retailers) to a pull-forward of demand in March that saw a very strong print. When paired with positives in more discretionary items like clothing and sporting goods up on the month, the recovery shows that the consumer is at least not hitting the emergency brakes just yet.

Contributors:

Kevin Chun, CFA kevin@macro4micro.com

Glenn Reynolds, CFA glenn@macro4micro.com

Macro4Micro

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