We expect retail sales to continue to recover in the second half of the year ahead of the holiday season, especially on inflation-adjusted terms as energy and commodity prices continue to roll over from their peaks.
Retail sales stayed flat in July on the back of a sharp drop in gasoline prices and lower automobile sales, the U.S. Census Bureau reported on Wednesday. With inflation remaining largely unchanged in July, retail sales after being adjusted for inflation should also likely be flat on the month.
Lower prices at the pumps helped consumers to increase their spending on other discretionary items. The control group—which excludes gasoline, automobile, building material and food services—rose 0.8% on the month in nominal terms.
That likely implied an increase in inflation-adjusted terms, as core inflation was only up 0.3% in July, according to data on the consumer price index released in early August.
Because sales in the control group are an important predicting indicator, accounting for about 25% of the consumer spending component of total GDP, we believe GDP in the third quarter will bounce back to positive territory after two consecutive quarters of declines.
The data came out at the same time as large national retailers like Walmart, Target and Home Depot reported their second-quarter earnings with mixed results.
We expect retail sales to continue to recover in the second half of the year ahead of the holiday season, especially on inflation-adjusted terms as energy and commodity prices continue to roll over from their peaks. Substantial discounts will become a major tailwind for sales volume due to excess inventories from retailers.
Inside the report
Sales at gas stations led the declining categories with a 1.8% drop in July, followed by a 1.6% drop in automobile sales. Clothing and sales at general merchandise stores also declined on the month.
The largest increase came from the non-store categories that include online sales, up 2.65% on the month, likely due to the record high sales from Amazon Prime day.
Following non-store sales were sales at miscellaneous stores and building material stores, up 1.52% and 1.46%, respectively.
Sales at restaurant and food stores was up slightly on the month, mostly due to inflation not higher demand as food prices went up 1.1% in July.
While not as severe as other reports in recent months on sales volume, July’s retail sales continued to show the impact of inflation on spending as real sales remained on a downward trend since March 2021.
If inflation continues to ease, we should expect retail sales to show some relief through the end of the year.
