Retail reality check

US retail sales, a key gauge of consumer spending, slipped 0.6% in July for the biggest drop in 14 months. Economists expected a 0.1% increase.

The decline was driven partly by temporary factors:

• Online sales fell 2.2%, the biggest drag on the report, after Amazon moved Prime Day from July to June and pulled some spending forward.
• Auto and parts sales fell 1.8%; another major drag on the headline number.
• Gas station sales fell 0.9%, as cheaper gasoline reduced the dollar value of sales even if drivers weren’t necessarily filling up less.

The headline number can be distorted by volatile categories like auto and gasoline. But there were signs of weakness underneath: Core retail sales, which strip out several volatile categories and are used to help calculate consumer spending in GDP, fell 0.4%, versus expectations for a 0.3% increase.

A softer shopper

Retail sales offer a timely read on one part of consumer spending, which accounts for more than two-thirds of the US economy. So a pullback here is a major signal for the broader growth outlook.

And so far, it’s not looking too great. Alongside the weak retail sales report, the University of Michigan’s preliminary consumer sentiment index hit below economists’ expectations, falling to 51 in August from 55.2 in July. That was its first decline in three months, and the drop was especially pronounced among older, lower-income consumers and those without a college degree, Bloomberg reported.

Economists say consumers are also becoming more price-sensitive as fiscal support fades. PNC’s research team notes that the bigger tax refunds that helped households absorb higher gas prices earlier this year are running out, leaving gas prices and income growth as the key swing factors for spending in the second half.

One silver lining for Warsh: A grumpier consumer could make the Fed’s job a little easier. First, softer consumer demand means businesses have less room to keep raising prices, which can ease inflation pressure. Second, the weak retail report comes alongside July job losses and mild core inflation, giving the Fed more evidence that growth is slowing. That lowers the likelihood of a September rate hike.

Next up: PCE lands Aug. 26, followed by August jobs numbers and CPI—the last big tests before the Fed meets in September. —SY