US retail sales unexpectedly fell in May, data out Wednesday showed.
The 0.3% decline from April disappointed expectations for a small gain (figure below). The range of estimates, from more than five-dozen economists, was -1.1% to 1.2%.
It marked the first decline since December. The pace of gains fell every month this year prior to May’s contraction. On a YoY basis, sales rose 8.1% — during a month when 12-month CPI rose 8.6%.
The ex-autos print likewise came in below expectations, and the control group was unchanged against estimates for a 0.3% advance. Seven of 13 categories rose, versus nine in April.
At the margins, the data may underscore growing concerns about a US consumer stuck uncomfortably between a rock and a hard place, as soaring inflation erodes wages and forces households to divert spending to necessities, while rate hikes work to reverse the vaunted “wealth effect” and push up the cost of servicing variable rate debt. Consumer sentiment dropped to an all-time low in early June, the preliminary read on the University of Michigan’s gauge showed.
Household wealth fell by more than half a billion dollars during the first quarter, when a $3 trillion decline in the value of equities overwhelmed another blockbuster gain for property prices.
Ostensibly, household balance sheets are strong. Constructive takes on the outlook for consumer spending all rely on some version of the “excess” savings narrative, which says “buffers” built during the pandemic will be sufficient to support spending and prevent the world’s largest economy from falling into recession.
Wednesday’s retail sales numbers won’t do anything to dispel a growing chorus of doubts about that thesis.
In addition to missing across key aggregates for May, April’s prints were all revised lower. That month’s 1% gain on the control group was revised to show an advance just half that size.
Spending fell for furniture, electronics and nonstore retailers in May. The largest gain was a 4% increase in spending at gas stations. On a 12-month basis, that figure was 43%.
As @derek and others have pointed out, the “excess savings” are in the accounts of those with less need to spend, and who have more exposure to asset prices, whose action gives these households less propensity to spend. Thus the excess savings observation can be correct, but that doesn’t necessarily support broad consumer spending.
This is starting to look like one of the shortest hiking cycles in history. Hey the FOMC may go another 150 bps soon, but it will be over in fairly short order. I know I sound like a broken record, but our modern economy is so much more highly leveraged that a relatively small amount of hikes in short term borrowing costs have an outsized effect. And by the way, I am not suggesting that some hikes aren’t in order. But the hawks are going to hold sway for only a short time. The economic statistics are hitting an inflection point now, the downturn is around the corner.
My turn to sound like a broken record . . .
If economic weakness leads the Fed to stop tightening in Aug/Sep after another +150bp, ending this tightening cycle with policy rate 225-250bp and 10 year at let’s say 450bp, where will inflation be by then?
What are the odds that CPI will still be high when the Fed ends tightening? Since energy, food, and shelter are >50% of the basket, seems like those odds are not “low”.
Does that mean the odds are pretty good that entering 4Q22 we are staring at “stagflation”, with economy in a downturn but inflation nonetheless high?
I know, posts that just a string of questions are irritating, but FOMC members must be asking the same questions.
At the end of the day, if push comes to shove, they may have to chooose between being the FOMC that resolutely beat back inflation at the cost of putting the economy into a recession (hero Vockler) OR the FOMC that cravenly surrendered to inflation and put the economy into stagflation (villan Burns/Miller).
Recessions are sort of routine, they happen every decade, and they can always hope it will be a mild/short one. 1970s style inflation and stagflation – that’s not routine, it is supposed to be impossible under the modern Fed (or so they say).
If I were on the FOMC, I’d rather be associated with the former than the latter. No contest.
Plus, the faster the economic data deteriorate from here, the more that deterioration will be a “sunk cost” by Aug/Sep. Pyschologically, anyway.
I agree, especially since raising rates does not address the main cause of the price increases, the need for business to adjust strategies in the face of the disruptions of the pandemic. The Fed does not produce oil, plant wheat and corn, overcome drought, lower the cost shipping container freight, make baby formula, etc. I’m not an expert but it seems to me the better course would be to cut the balance sheet more and raise rates more slowly. Plenty of room to cut the B/S while the housing market is already feeling the heat of rate rises. Things won’t get better soon.
I think the only way to avoid stagflation would be to stop QT and turn QE back on. Inflation is being driven by circumstances outside of the FOMC’s control. Raising rates and reducing debt will help but they can’t solve supply chain issues and the lack of oil and food production. So either you turn back on the stimulus drip and avoid the recession but also make peace with permanent inflation, or you stay the course and endure stagflation until the external factors are resolved that caused inflation in the first place.
That would cause an economic recession and angry voters but in the end will make room for another growth cycle in a couple of years. Are we playing the long game or short, that’s really where the calculus lies.
US federal government annual interest expense will be increasing significantly from $395B in 2021.
$1T is not inconceivable if rates stay high, which is why they won’t.
I can put up with almost anything, but if I have to listen to the phrase “No one could have foreseen this,” I will be very disappointed. Here’s what an old partner told me in 1990, “Young man, the purpose of a recession is to restore the money to its rightful owners….
Retail sales dropping but am I the only person noticing that restaurants and bars are packed?