The July retail sales numbers released by the Commerce Department on Thursday continued to reinforce that the resilient consumer has kept the economy afloat amid trade tensions and an unstable economic environment outside of the United States. The question is, how long will it last?
While retail sales showed strength across many sectors, the highlight once again was the increase in non-store sales, which are up 19.3% year over year. The July numbers include two critical events, Amazon Prime Day, and the start of the back-to-school shopping season. Factoring in these one-time events, the strong numbers may not be a huge surprise. But strength goes beyond July’s results. The three month average annualized pace for retail sales, excluding autos and gas sales, is 9.2%. Strong retail sales are a trend, not an isolated incident.
Is sales growth sustainable?
The likely catalyst for continued strength in retail sales is strong wages. In August, the government’s first-quarter labor costs were revised upward significantly. Compensation per hour was adjusted to a very robust 9.2% increase. However, the growth in wages did appear to peak in the second quarter.
The “uncertainty tax” associated with the trade dispute has caused significant volatility in equity markets. If the market has a diminishing effect on wealth, or even creates that perception, it may further dampen consumer sentiment for households that spend the most and have the greatest impact on consumption.
The “uncertainty tax” associated with the trade dispute has caused significant volatility in equity markets. If the market has a diminishing effect on wealth, or even creates that perception, it may further dampen consumer sentiment for households that spend the most and have the greatest impact on consumption.
If wages did, in fact, peak, and the trade dispute and its effect on equity markets erodes consumer sentiment, we could see the strong consumption trend change. History tells us that the economy usually falls into a recession suddenly, rather than slowly declining. Most recently, in December of 2006, household consumption numbers were very strong, only to slip into a recession six months later. A sudden decline in consumption would likely be enough to throw the U.S. economy into recession.
As the critical holiday selling season approaches, the outcome of trade discussions with China will have a very significant impact on how the economy finishes this year. A recession is not yet imminent, but the economy is clearly slowing. Consumer products companies should have both a short term plan to take them through the holiday season, as well as a longer term strategy to deal with a slowing economy.
