US retail sales and consumer health
At first glance, the latest US retail sales and consumer sentiment numbers reaffirm what we’ve seen over the past few months: the US consumer remains resilient, despite concerns over tariffs. Retail sales in June reversed a two-month downturn, driven by strength in motor vehicle and restaurant spending, according to preliminary data from the Bureau of Labor Statistics. The University of Michigan’s consumer sentiment index also inched up in July.
But a closer look at the numbers shows consumers may be starting to strain from tariff pressures. Sales of furniture, as well as electronics and appliances — two import-dependent categories that saw price increases in the June CPI report — noticeably declined. Furniture retail sales were down 6.2 per cent from May, while electronics and appliances slumped more than 3 per cent.
A broader view of spending trends gives more reason for concern. The 12-month rolling correlation between the monthly changes in core CPI and month-over-month fluctuations in retail sales — how price changes relate to spending — has been negative throughout the year. In short, consumers are starting to pull back as prices rise. That marks a big shift from prior years. In 2022 and 2023, the correlation was positive, even as prices rose at a much faster rate.
This suggests that the mighty US consumer has, at long last, run out of steam — or has been increasingly price sensitive for some time now. Another reason why the headline retail sales figure may not be as robust as it seems is that rising prices could be inflating the numbers, as Michael Pearce at Oxford Economics explains:
Retail sales rose faster than expected in June, but with some of that strength reflecting tariff-driven price increases, our estimate is that inflation-adjusted consumer spending was unchanged in June. We expect real consumption growth slowed below 1 per cent annualised Q2, and weaker gains in real disposable incomes will mean subdued growth persists in Q3.
Granted, retail sales have always been reported in nominal dollar terms. But now that there are signs that American consumers aren’t tolerating inflation, the weakness behind the headline figure sticks out. Consumers aren’t as strong as they appear.