Wall Street is cheering after fresh data showed American consumers aren’t tapping out quite yet, despite a disappointing few months for retailers.
US retail spending has been mostly flat since the beginning of the year, holding steady in June, the Commerce Department reported Tuesday. Consumer spending is American’s main economic engine, powering two-thirds of the US economy. Retail sales, which capture spending on goods and food services, make up a big chunk of overall spending.
June’s reading was better than the outright decline economists projected in a FactSet poll — a shift from prior months when retail sales consistently came in worse than expected. The figures are adjusted for seasonal swings but not inflation.
US consumers’ surprising show of resilience helped send stocks higher on Tuesday, with the Dow reaching a new record.
Sales at gas stations declined the most last month, dropping 3% from May. Spending at car dealerships and on automotive parts also fell markedly in June, reflecting the cyberattack on CDK Global, a software provider for dealerships. Excluding spending at gas stations and on cars, sales were up a solid 0.8% in June.
Meanwhile, online sales were up a healthy 1.9% in June. The strength from that category could persist in July due to Amazon’s annual deal event known as Prime Day. Sales at home improvement stores were also robust last month, rising 1.4%.
The Federal Reserve and Wall Street investors are paying close attention to the health of the US consumer. Unemployment has crept up in recent months as evidence mounts that the American shopper is spending more cautiously nowadays. The economic landscape has proven challenging for some consumers in a few ways.
Inflation has resumed a downward trend, but it’s still elevated; interest rates have been perched at a 23-year high for about a year now; savings accumulated during the pandemic have been exhausted by now, according to some measures; and job opportunities aren’t as ubiquitous as they were a few years ago.
Retailers have said in recent months that a growing number of shoppers are now opting for cheaper alternatives. As earnings season kicks off, big-box stores are set to share some key details on Americans’ spending behavior.
There is plenty of evidence by now that the US economy is slowing, but it likely won’t fall off a cliff this year. Fed officials and most economists aren’t expecting a recession this year, but it’s unclear whether unemployment will hold steady or continue to climb after it rose to a 4.1% rate in June, the highest since November 2021.
“Consumers have become increasingly cautious with their spending as they feel the pinch from higher prices and borrowing costs, but the latest report shows no signs of consumer retrenchment,” said Lydia Boussour, a senior economist at EY-Parthenon, in a note Tuesday.
Companies continue to sound the alarm on the US consumer
Helen of Troy, the company behind notable brands such as Vicks, Braun and Revlon, last week reported weak quarterly earnings, sending shares of the company plummeting by more than 25%.
“Consumers are even more financially stretched and are even further prioritizing essentials over discretionary items,” Noel Geoffroy, the company’s chief executive, said on an earnings call, adding that “traffic overall is slower throughout the country and promotional pressure is increasing.”
PepsiCo’s latest earnings results, out last week, also disappointed investors in some key areas. The company’s snack unit Frito-Lay posted a dip in revenue after hiking prices for multiple quarters. The strain US consumers are feeling has resulted in “tighter household financial conditions,” the company said, so “performance across many food categories, including snacks, has been subdued and consumers have become more value-conscious.”
Conagra Brands, which includes Slim Jim beef jerky and Vlasic pickles, last week reported weaker sales in its latest quarter and said it expects lower profits in the fiscal year ahead. Chief executive Sean Connolly said that consumer demand has been disappointing but expects it to improve as “as consumers adapt and establish new reference prices.”
What it means for the Fed
Tuesday’s report doesn’t change much for the central bank as it mulls the timing of the first interest rate cut.
The Fed seems to be on track to cutting interest rates at some point in the next few months, thanks to inflation moderating again after getting stuck early this year. The latest Consumer Price Index, released last week, showed that monthly prices declined in June. On an annual basis, prices were up 3%, down from May’s 3.3% rate. The latest inflation readings, coupled with signs of a slowing economy as reflected in the latest spending figures, help build a case for Fed officials to begin paring back interest rates.
Fed Chair Jerome Powell cheered the latest inflation figures Monday, saying during a moderated discussion in Washington: “We’ve had three better readings, and if you average them, that’s a pretty good pace.” He added that recent economic data “add some confidence” that inflation is getting under control.
Wall Street traders are currently betting that the Fed will roll out its first rate cut at the September 17-18 meeting, but there are still several crucial pieces of economic data due before central bank officials next meet to discuss monetary policy.
CNN’s Krystal Hur contributed to this report.
