A Silver Lining in Retail Sales Numbers That’s Anything But Solid

Recent retail sales numbers have been met with a collective shrug by economists and investors alike. A 0.2% increase from May to June might seem underwhelming, especially when compared to the revised 1% growth in April-to-May sales that was hailed as a positive sign for second-quarter GDP.

The decline in retail sales can be largely attributed to the sharp drop in gas station sales, which plummeted by 5.3%. This is no surprise, given the ongoing tensions between the US and Iran that have disrupted crude oil shipping in the Persian Gulf. However, lower energy costs – down 5.7% last month, with gas prices at the pump tumbling 9.7% – are a welcome respite from the economic strain.

Bill Adams, chief US economist for Fifth Third Commercial Bank, notes that this drop in energy costs has had a ripple effect on consumer spending. While retail sales might seem stagnant, discretionary spending is actually thriving. For example, sales rose by 15.2% year over year at sporting goods, hobby, musical instrument, and book stores; 14.2% at nonstore retailers (like Amazon); 8.6% at electronics and appliance stores; and 6% at car dealerships.

This trend speaks to the resilience of American consumers in the face of economic uncertainty. As Adams noted, “consumers are grumbling about the state of the economy in surveys, then turning around to spend open-handedly.” This behavior is not new – it’s a pattern that has persisted throughout the post-pandemic expansion.

However, what does this mean for retailers and investors? The VanEck Retail ETF, which tracks the largest US retailers, rose 1.6% on Thursday in response to the revised sales data. While this might be seen as a positive sign for retailers set to report in the next few weeks, it’s essential to examine these numbers more closely.

The drop in energy costs has undoubtedly provided some relief to consumers, but its impact is short-lived. As diplomatic tensions between the US and Iran rise once again, energy prices are expected to increase. This could have far-reaching consequences for consumer spending, particularly if gas station sales continue to decline.

Furthermore, this trend raises questions about the sustainability of economic growth in the face of rising inflation. The Consumer Price Index showed a 0.4% drop last month, but this is largely due to the ongoing pressure on energy prices. As these costs begin to rise again, it’s unclear whether consumers will continue to spend with such vigor.

As policymakers and investors look ahead to the second half of the year, they must consider the limitations of this trend. The silver lining in retail sales might be a temporary reprieve from economic uncertainty, but its durability is uncertain.