- Retail sales declined by 1.1% m/m in July, well below the consensus forecast for a decline of -0.3%. June’s data was revised up to a stronger +0.7% m/m (from +0.6%).
- The volatile categories were mostly in the red in July. Supply-chain constraints that are constraining auto production continue to affect the motor vehicles and parts category, where sales declined for the third month in a row (-3.9% m/m) and accounted for roughly two thirds of the slowdown in July. Demand for building materials and garden equipment seemed to have levelled off since the spring as evident by another month of decline (-1.2% m/m), while food and beverage stores (-0.7% m/m) saw a reversal of the four-month growth streak. Meantime, growth in gasoline stations (+2.4% m/m) reflected the consumers’ preferences for travelling in the summer.
- Retail sales in the “control group,” which exclude the above categories, dropped by 1.0% m/m. But June’s gain was revised up to +1.4%, from +1.1% in the advance estimate. This suggests that personal consumption expenditures may have slowed in July.
- It wasn’t all bad news. Miscellaneous stores retailers (+3.5% m/m), food services & drinking places (+1.7% m/m), and health & personal care (+0.1% m/m) grew in July, albeit at a slower rate than in June.
Key Implications
- The decline in retail sales in July reflects largely the waning power of stimulus payments and the shift in consumer spending away from goods and towards services. The recent weakness in auto sales made a notable dent in the headline reading and, judging by the scarcity of supply, will continue to weigh on retail sales in the coming months.
- It is likely a bit early to say that the upswing in the Delta variant impacted spending in July. However some high-frequency indicators are showing a loss of momentum that is likely to show up in August consumption. Overall consumer spending growth is expected to slow to a lower single-digit pace in Q3 from its stimulus-driven near 12% annualized pace in Q1. Still, the outlook for economic activity is not as dire as during the past outbreaks. According to the Institute for Health Metrics and Evaluation, an expected increase in cases, hospitalizations and deaths should peak and decline by some point in September, while its magnitude should remain short of the winter surge thanks to vaccine efficacy. This points a more limited setback in spending than what we’ve seen in the past.
