Consumer spending and retail sales have done the heavy lifting in carrying the economy this year and keeping it out of recession. In the first quarter, consumer spending accounted for about 68% of the gross domestic product in the U.S.
Retail stocks have benefited from this trend, returning 45% on average over the past year and 21% year to date. In fact, those are the best returns among all segments of the consumer discretionary sector.
However, the U.S. Census Bureau released data on retail sales for May on Tuesday, and the numbers were underwhelming. Here’s what this means for the broader financial markets.
Retail sales disappoint in May
Consumers spent $703.1 billion on retail and food services last month, according to the May retail-sales report. That is up 0.1% from the previous month and 2.3% higher than the total recorded in May 2023.
However, the retail-sales total was slightly below the median estimate of a 0.2% increase in May.
Retail-trade sales climbed 0.2% in May compared to April and 2% year over year. Non-store retailers saw their sales increase 6.8% year over year, while sales at food services and drinking places were up 3.8%.
The specific areas in which retail sales were up on the month include motor vehicle sales and parts, clothing stores, sporting goods retailers, pharmacies, and general merchandise outlets. Sales at electronics and furniture stores fell, as did sales at gas stations, restaurant, and grocery stores.
In addition, the Census Bureau revised its estimate for April lower. Previously, retail sales in April were reported as flat. However, the revised numbers show sales actually went down 0.2% in April from the previous month.
What this means for interest rates
The major economic report released on Tuesday was retail sales, so a subpar report might normally suggest a slumping market. However, these are not normal times, and a disappointing retail sales report is not necessarily disappointing to investors.
The major indexes all trended higher shortly after the opening bell on Tuesday, likely due to the idea that slower-than-anticipated retail sales means inflation and high interest rates are slowing the economy down.
Consumer spending had been largely immune from the negative effects of the economy due to the combination of a resilient consumer and higher prices caused by inflation, which increased sales. However, two subpar months in a row, including an April total that was revised lower, suggest that inflation is finally taking its toll and causing consumers to spend less.
This is the type of economic data that the Federal Reserve is looking at in determining when to lower interest rates. In its attempt to execute a soft landing, the Fed has raised rates to slow down the economy and lower inflation toward its long-term target of 2%.
These retail sales numbers would suggest the central bank’s efforts are working, which could prompt policymakers to begin lowering interest rates to relieve some of the inflationary pressures and navigate a soft landing.
That is likely why the markets trended up on Tuesday morning.
Connecting the dots
Last week, the Federal Open Market Committee decided to keep rates where they have been since last July and projected one rate cut in 2024 in its summary of projections. However, eight of the 19 members projected two rate cuts this year.
This is just one of the many economic reports that the Fed examines. The next big one is due to drop on June 28, when the Personal Consumption Expenditures report on inflation rates comes out.
