U.S. retail sales rebounded strongly in June as Americans spent more on gasoline and other goods amid soaring inflation, which could allay fears of an imminent recession but not change the view that economic growth in the second quarter was tepid, if not slightly negative.
Is it good enough to stave off a recession next year? Consumer spending drives almost two-thirds of economic growth, with retail sales half of spending. The post-pandemic spending spike has slowly subsided from a 100-mph speed aided by government subsidies to its present 60-mph cruising speed, as I said last week; which is still above average per the FRED graph.
Maintaining that speed depends in part on the inflation picture, of course, which will slowly subside as the supply-shocks diminish. Gas prices, for instance, have dropped more than 40 cents over the past month, which is a large part of the recent inflation surge.
Reuters reports the nearly broad increase in retail sales last month was led by receipts at auto dealerships, which rebounded 0.8 percent after declining 3.0 percent in May amid shortages. Sales at service stations increased 3.6 percent.
“Gasoline prices surged in June, averaging above $5 per gallon,” said Reuters, “according to data from motorist advocacy group AAA. Prices at the pump have since declined from last month's record peaks and were averaging $4.577 per gallon on Friday.
Receipts at bars and restaurants, the only services category in the retail sales report, increased 1.0 percent, another sign of strength. There were strong gains in sales at furniture and electronics and appliance retailers. Receipts at sporting goods, hobby, musical instruments, and bookstores also rose. Online store sales rebounded 2.2 percent.
The annual CPI retail rate in the US accelerated to 9.1 percent in June of 2022, the highest since November of 1981, from 8.6 percent in May and above market forecasts of 8.8 percent.
It was mainly energy prices that rose 41.6 percent, the most since April 1980, boosted by gasoline (59.9 percent), fuel oil (98.5 percent), electricity (13.7 percent, the largest increase since April 2006), and natural gas (38.4 percent, the largest increase since October 2005).
Consumer spending is keeping up with inflation to date, with personal consumption expenditures (PCE) still up 7.2 percent overall, 5.2 percent YoY without more volatile food and energy prices, which is causing most of the current inflationary spike.
Concern about inflation eased in July alongside a sharp drop in gasoline prices over the past month, reports the University of Michigan consumer sentiment survey.
Thanks to Paul Krugman and the NY Times for this graph showing the gradual decrease in 3-year and 5-year inflation expectations, an important indicator of how consumers might behave if higher inflation isn’t prolonged.
The University of Michigan's preliminary survey of consumers for July published on Friday showed consumers see inflation running at 2.8 percent over a five-year horizon, the lowest in a year and down from 3.1 percent in June. Their one-year outlook for price increases moderated to 5.2 percent from 5.3 percent a month earlier and was the lowest since February.
Inflation worries are still causing the whipsaw in financial market prices. So, how long can this surge in prices last, given the Ukraine war, China’s COVID problems, and the ongoing pandemic restrictions?
Even if growth continues to slow further, consumers at present are saying they are optimistic enough about the future to avoid a recession.
Harlan Green © 2022
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