Higher prices resulting from inflation helped give U.S. retail sales a 0.3 percent uptick in August to $683.3 billion, following a downwardly revised 0.4 percent decline in July.
Excluding gasoline sales, retail sales rose 0.8 percent. The Commerce Department figures aren’t adjusted for inflation. Retail sales have been essentially flat for the past year after adjusting for inflation.
Helping retail sales in August were lower prices at the gas pump, as well as a 2.8 percent increase in spending on automobiles and parts and a 1.1 percent gain in spending at restaurants and bars.
On a seasonally adjusted basis, apparel and accessories sales at specialty stores rose 0.4 percent from July’s figures, while department store sales increased 0.9 percent. Sales at nonstore retailers, the category that includes internet-only operations, fell 0.7 percent. Sales at furniture and home furnishings stores fell 1.3 percent.
Consumers shopped for apparel as part of their August back-to-school (BTS) preparations. Ethan Chernofsky, vice president marketing at Placer.ai, said that inflation, high gas prices and a comparison to an especially strong BTS season in 2021 proved challenging for retailers, with visits to superstores and discount chains in August down year-over-year, giving the discount and dollar channel its first decline in 2022. However, he said apparel was up 1.7 percent in August at superstores and discount chains, and even rose over 2019. Consumers who resume the “mission-driven shopping trend already experienced by Target and Walmart this summer” could boost basker sizes, he added.
Jefferies retail analyst Ashley Helgans said Thursday that the sales data illustrates consumers’ interest in spending on more than the essentials. And credit analyst David Silverman, senior director at ratings firm The Fitch Group, said shoppers’ willingness to continue to spend after several years of strong growth supports a constructive view on consumer health. “High inventory levels, as discussed in the recent earnings seasons, should lead to elevated promotional activity in categories like apparel and home through the remainder of the year, depressing company margins although potentially providing some modest inflationary relief to customers willing to bargain hunt in these categories,” Silverman said.
Wells Fargo economists said that five of 13 categories posting sales declines in August suggests that the “staying power of consumer spending is waning.” Excluding autos, the “actual level of retails sales is lower in August than it was in June,” and while July retail sales got a boost from Amazon Prime Day, “demand for durable goods” such as in the home category “is now translating into flat or slightly negative outlays,” they added.
“We anticipate the economy entering a mild recession early next year and although we anticipated this retrenchment in consumer spending, this is not yet the start of the downturn,” Wells Fargo economists Tim Quinlan and Shannon Seery wrote in a report. “Consumer demand for services and experience-oriented spending remains intact, for now. This was evident in the 1.1 percent increase in spending in bars and restaurants.”
The economists also noted that the consumer price index (CPI) surprised to the upside, with the underlying drivers emphasizing how supply chain pressure continues to boost prices.
But with inflation up 8.3 percent since last year and far from under control, there’s now speculation on just how high the next rate hike could be at the Federal Reserve’s September meeting on Tuesday and Wednesday. The hot inflation data from the CPI report indicates that the Fed is likely to raise rates by at least a 0.75 percentage point, although there’s speculation that even a 1 percentage point increase is a possibility. Before the CPI report, some economists thought the pace of rate hikes could slow to a half a percentage point increase.
Fed Chairman Jerome Powell said last month that the U.S. central bank is committed to its 2 percent inflation target. The Fed has raised rates four times this year, with a pair of 0.75 percent hikes in June and July, bringing rates to between 2.25 percent to 2.50 percent.
On Thursday, first time jobless claims fell for week ended Sept. 10, representing the fifth straight week of declines, according to data from the Labor Department. That kind of data suggests a fairly strong economy as employers remain on the hunt to fill open positions. And it’s the kind of data that the Fed would be examining for signs of a slowdown. With the jobs front relatively tight and CPI high, there’s no incentive for the Fed to even consider just a 0.5 percent increase.
Other data shows that mortgage rates are now over 6 percent—6.859 percent to be exact for a 30-year fixed term—for the first time since the great recession in 2008. Another Fed rate hike would see mortgage rates eventually climb even higher, not to mention send business borrowing costs higher. With inflation still climbing, consumers will see continued increases in costs for food, housing and utilities, leaving far less left over for discretionary spending on fashion and home furnishings.
NRF chief economist Jack Kleinhenz said that while consumers are benefitting from strong job and wage growth, there are limits particularly if prices do not start to come down. “This retail sales report comes amid mixed signals from the broader economy that show the headwinds against the consumer are strengthening,” he said.
NRF president and CEO Matthew Shay said consumers are seeking value to make their dollars stretch, and that retailers have been hard at work to provide “consumers with great products, competitive prices and convenience at every opportunity.”