Soft U.S. retail sales point to moderating growth trend following reopening spurt

Soft U.S. retail sales point to moderating growth trend following reopening spurt

*Retail sales fell 1.1% in July, more than offsetting an upwardly revised 0.7% rise in June, as sales excluding autos dipped 0.4% and sales of motor vehicles and parts fell sharply for the third consecutive month, reflecting supply constraints (Charts 1 and 2).

*The flattening of retail sales, which now comprise 39% of total personal consumption expenditures, reflects a combination of factors: a natural moderation following its earlier spurt as the economy reopened, more spending on services, the negative impact of health concerns related to the Delta variant, and accelerating prices of durable and nondurable goods.

*While a slowdown following the reopening spurt in retail sales was inevitable, a big question is the extent to which the Delta variant and higher inflation will weigh on sales, and for how long. Although the factors normally driving consumer spending remain very positive—rising employment, wages, and disposable income; low interest rates; and record high household net worth—the negative factors likely will result in slower-than-forecasted growth in overall consumption in the third quarter. In fact, the sales control group—retail sales excluding autos, building materials, and gasoline stations—fell 1.0% in July, lowering it 0.5% below the Q2 average (Chart 3). While consumption of services remains in a strong upward growth trajectory, the pace of total consumption is softening.

*The auto industry continues to suffer from lack from insufficient supply: sales of motor vehicles and parts fell 3.9% in July, its third consecutive sharp decline as auto inventories have fallen substantially (Chart 4).

*Inventories are also low in other sectors, and the overall retail inventory/sales ratio has fallen to its lowest level in decades (Chart 5).

Chart 1: Monthly retail sales

Chart 2: Monthly retail sales ex. Motor vehicle and parts

Chart 3: Control group retail sales (ex. Auto, gas stations, building materials)

Chart 4: Retail Inventory of motor vehicles and parts

Chart 5: Inventory to sales ratio

Mickey Levy, [email protected]

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