U.S. retail sales fell 0.6 per cent in July according to the Commerce Department’s Census Bureau, marking a sharp pullback in consumer spending after a strong stretch fueled by tax refunds and early shopping events. According to Reuters, the decline was larger than anticipated by economists, who had generally forecasted retail sales to edge up 0.1 per cent.
Retail Sales Drop 0.6 Per Cent in July Following Refund Boost
The 0.6 per cent drop reported by the Census Bureau follows an unrevised 0.2 per cent gain in June. Economists polled by Reuters had predicted outcomes ranging from a 0.5 per cent drop to a 0.7 per cent increase for July. Generous tax refunds earlier in the year had previously helped households offset higher gasoline prices driven by Middle East conflicts, leading to robust second-quarter consumer spending, according to Bloomberg. However, those refunds have now been exhausted.
Additional downward pressure in July came from retail calendar shifts. Amazon pulled forward its Prime Day promotion from July to June, prompting competing sales across the broader retail sector and drawing purchases away from July. Furthermore, gasoline prices declined last month, which lowered receipts at service stations, while auto manufacturers reported a drop in unit sales.
Core Retail Sales and Economic Impact
Core retail sales—which exclude automobiles, gasoline, building materials, and food services—fell 0.4 per cent in July following a downwardly revised 0.4 per cent increase in June, according to data cited by The Globe and Mail. Economists had previously forecast core retail sales to rise 0.3 per cent. These core figures correspond closely with the consumer spending component of gross domestic product.
Consumer spending accounts for more than two-thirds of the U.S. economy and grew at a 3.2 per cent annualized rate in the second quarter, helping the broader economy expand at a 1.5 per cent pace. Despite the July contraction, economists expect consumer spending to retain some underlying support. The S&P 500 index has risen 14 per cent this year, boosting household wealth through the stock market.
Household Wealth and Consumer Sensitivity
Analysts at PNC Financial noted that bank data indicates households became more sensitive to rising gasoline prices in July than earlier in the year. This sensitivity creates a less supportive environment for spending heading into the second half of the year. Even so, PNC Financial analysts stated that it remains difficult to envision a scenario where spending truly rolls over completely, pointing to rising household wealth.
"We see increasing evidence of upper-income and older households cashing in on wealth gains to support spending," PNC Financial economists wrote in a note cited by The Globe and Mail.
While the back-to-school shopping season faces headwinds as inflation outruns wage growth, broader wealth gains from equity markets are expected to cushion upper-income and older demographics, mitigating the slowdown in overall consumer activity.
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