US: Retail Sales Lose Steam in July

Retail sales were flat month-on-month (m/m) in July – a notch below the consensus forecast (+0.1% m/m) –  and decelerating from June’s reading, which was revised down to 0.8% m/m from 1.0% m/m reported earlier.

Sales at autos & parts dealers dropped 1.6% m/m from June’s downwardly revised rate of 0.5% (+0.8% m/m, previously). Excluding autos, retail sales were up 0.4% m/m in July, above the consensus forecast of -0.1% m/m.

Sales at gasoline stations were down by 1.8% m/m, reflecting the 7.7% pullback in gas prices. Adjusted for prices, sales were up at 6.4% m/m. Meanwhile, sales at building materials retailers were up 1.5% in July.

The “control group”, which excludes the most volatile components and is used in calculating personal consumption expenditures (and GDP), was up in July gaining 0.8% m/m – two tenths of a percentage points higher than expected by the consensus. July’s reading was revised down to 0.7% m/m from 0.8% m/m reported previously.

Within the group, the biggest contributors to growth were sales at non-store retailers (+2.7% m/m), miscellaneous stores retailers (+1.5% m/m), furniture & electronics/appliance stores (+0.3% m/m), and health & personal care stores (+0.4% m/m). Food services & drinking places – the only service category in today’s report – was up by 0.1% m/m, but it declined by 0.5% m/m in real terms.

The only two categories in the red were department stores (-0.7% m/m) and clothing & accessory stores (-0.6% m/m).

Key Implications

That’s more like it. Moderation in retail sales momentum has been expected as consumers continue to shift their attention to services spending. Price-adjusted, retail sales came in flat, which points to PCE growth of somewhere around 0.5-0.7% (annualized) in the third quarter.

Lower prices at the pump contributed to softer growth in today’s report, despite freeing up some money to be spent elsewhere. Consumers directed their attention to bargains during Amazon’s “biggest Prime Day Event ever”, which, with $3 billion in sales, contributed handsomely to headline growth this month. Despite softness in the housing market, sales at building materials and equipment stores came in at one percent in real terms suggesting that consumers continue devote a sizeable share of spending to home improvements.

Like July’s CPI reading, today’s release suggests things are moving in the right direction, but it’s still too early for the Fed to pivot away from the hiking cycle. We maintain the view that a 50 basis point hike will be considered enough in September but will have more clarity after the August jobs and inflation data give us a better understanding of whether the recent moderation has more legs.