Retail sales fell 1.1% in July as consumer spending likely experienced some drag from the spread of the Delta variant late in the month. The drop was larger than Bloomberg’s consensus forecast of a 0.3% decline and reversed June’s 0.7% advance.
Excluding volatile auto sales, the story was similar with a 0.4% decline in July, below the prior month’s 1.6% advance and the consensus forecast calling for a 0.2% increase. The good news in the non-auto numbers was the 0.7 point positive revision to non-auto sales for prior months.
Even though sales have generally been flat on a month-to-month basis since the stimulus and reopening surges in March 2021, these numbers still look quite strong on a year-over-year basis, as shown in the LPL Chart of the Day. With or without autos, retail sales were up about 16% year over year, though the shrinking boost from base effects (comparisons to the year-ago period have gotten tougher) and fading stimulus have taken annual sales growth rates down from over 50% in April (and 42.6% ex. autos) to mid-teens currently.
“The Delta variant and fading stimulus are at least partly to blame for soft retail sales last month, even though restaurants saw gains during the month,” explained LPL Financial Equity Strategist Jeffrey Buchbinder. “Meanwhile, some consumers may be balking at higher prices, while others may have finished their pandemic-driven home improvement projects.”
Several soft spots were evident in the report. First, autos (-3.9%) are being hurt by high prices and low inventories related to global chip shortages. Second, e-commerce sales (-3.1%) likely saw some July sales pulled forward from the Amazon Prime event in June. Third, clothing sales (-2.6%) were down after being up 7.6% the previous two months. And last, building materials (-1.2%) continued to feel the effects of the cooling housing and home improvement markets. Despite these pockets of weakness, and several months of flat sales overall, we don’t think this report changes the Federal Reserve’s timetable for tapering its bond purchases, likely to begin within the next 3 to 5 months.
Looking ahead, based on early-August dips in high-frequency data like restaurant dining and airline travel, next month’s retail sales may be hurt a bit more by the Delta variant. Soft consumer spending to start the third quarter could cause economic growth to decelerate from the second quarter—which grew 6.5%—to the third, based on real (inflation-adjusted) gross domestic product. That means there may be some downside to the consensus forecast for third quarter GDP growth of 6.9% annualized.
Keep in mind that successfully tackling the Delta variant could set up a fourth quarter growth rebound. Some of the states hit early by this latest COVID-19 wave are starting to see cases fall, including in Missouri and Arkansas. Consumers also still have a ton of excess savings—in the neighborhood of $2 trillion worth. So as the economy hopefully moves past the pandemic this fall, those dollars should end up supporting the economy—particularly on the services side.
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