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Fed Hikes Rates After ‘Sharp’ Sales Decline

Retail sales in May fell for the first time in five months, sparking fears of a broader slowdown through the rest of the year.

Sales in the U.S. last month dipped 0.3 percent following April’s 0.7 percent increase, the Commerce Department data reported Wednesday.

“Retail trade sales were down 0.4 percent from April 2022, but up 6.9 percent above last year,” it said. Auto sales recorded the biggest decline last month at down 3.5 percent. Excluding autos, retail sales were up 0.5 percent. Excluding autos and spending at gas stations, which was up 4 percent, retail sales rose just 0.1 percent—the smallest gain in five months.

Apparel and accessories stores were essentially flat at $26.32 billion last month from $26.28 billion in April, seasonally adjusted. Sales at department stores rose 1 percent to $11.55 billion from $11.44 billion. Sales are general merchandise stores were essentially flat at $68.20 billion from $68.12 billion, while sales at non-store retailers—including e-tailers—were down 1 percent to $102.87 billion from $103.89 billion. Sales at furniture and home furnishings stores also fell 1 percent to $12.18 billion from $12.29 billion.

Apparel and home’s sales were stronger than they were a year ago, but the trend line month-over-month could be worrisome, especially as high inflation means consumers have less money to spend.

The Federal Reserve on Wednesday hiked interest rates 0.75 percent for the single-biggest bump since 1994, a move that signals inflation’s threat to the economy.

Inflation continues to be the biggest headache for consumers as price gains have spread and the higher cost of less discretionary items like food and gas make for tough spending decisions elsewhere. Once adjusting for inflation, we estimate real retail sales declined a sharp 1.6 percent last month,” Wells Fargo economists Tim Quinlan and Shannon Seery wrote in a research note published Wednesday.

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“In short, the factors that have sustained spending thus far are getting near the end of their rope, and we are increasingly concerned that goods spending will slow sharply and that will be particularly evident in retail sales which is mostly a measure of goods spending,” they added.

Others also echoed the concerns over a sharp slowdown in consumer spending.

“Given that the monthly retail sales data is not adjusted for inflation, this decline means that consumers are spending significantly less than we would expect to see at a normal inflation rate of 2 to 3 percent,” Natalie Kotlyar, national leader of BDO’s retail and consumer products practice, said. “As we head into the summer months, and as gas prices remain high, we will see if consumers pull back on summer travel and discretionary spending.”

David Silverman, senior director at credit ratings firm Fitch Ratings, said May’s numbers come on the heels of a “volatile” first quarter marked by “topline disappointments” at many retail companies.

“Fitch expects a heightened promotional environment through the summer as retailers clear excess goods,” he added.

Silverman blamed bloated inventories on supply chain disruption and delays. Retailers that cut orders in the next six months could support the sector’s health and help ease transportation bottlenecks, he added.

The National Retail Federation’s top exec said more action is needed to ease the burden on shoppers.

“Retailers are doing what they can to keep prices down, but we continue our call on the administration to repeal unnecessary and costly tariffs on goods from China to relieve pressure on American consumers and their family budgets,” said Matthew Shay, president and CEO at the retail trade group.

Back-to-school: boom or bust?

May’s disappointing sales comes as the back-to-school (BTS) season is just four weeks away.

Mastercard SpendingPulse projects 7.5 percent growth for the July 14-Sept. 5 season when people prepare for school-age students to return to K-12 and collegiate classrooms. It doesn’t factor in auto sales.

“Back-to-school is the second biggest season for retailers and is often looked at as an early indicator of retail momentum ahead of the traditional holiday season,” Steve Sadove, senior advisor for Mastercard and former CEO and chairman of Saks Incorporated, said. “While Mastercard SpendingPulse anticipates growth across sectors, retailers will need to find innovative ways to entice shoppers as discretionary spending potentially stretches thin as a result of increasing prices.”

Mastercard expects an 8.2 percent increase in in-store sales and a 4.3 percent uptick in e-commerce sales during the BTS season. Trying on apparel is one reason why consumers still find themselves going to physical stores, which could help department stores continue the momentum of a 15-month rebound following a multi-year decline.

Social events such as weddings, events and vacations will continue to fuel clothing sales for the foreseeable future, Mastercard said. Credit card data shows May’s retail sales in the U.S. rose 10.5 percent year-over-year, with apparel (17.4 percent), department stores (12.0 percent), and luxury (20.2 percent) each improving.

The effects of inflation are being felt worldwide. The U.K. is worried about the health of its economy. The Organisation for Economic Co-operation and Development (OECD) said rising living costs, including higher fuel prices, could leave the U.K. with the weakest economy in G7 next year. The OECD said inflation is at a 40-year high of 9 percent and could reach 10 percent or higher this year.

A Eurostat report, from the statistical office of the European Union (EU), said that annual inflation in the euro area hit 8.2 percent in May, up from 7.4 percent in April.

Inflation in Sweden, an EU member that hasn’t adopted the euro, was at 6.4 percent in April, representing the highest inflation rate since December 1991. For now, that hasn’t curtailed apparel sales at H&M Group, which said on Wednesday that second quarter net sales in local currencies from March 1-May 31 rose 17 percent to 54.50 billion Swedish krona ($5.31 billion).