Retail sales rise again, pointing to resilience of the U.S. economy

Retail sales have clearly slowed in the past year. Receipts in April and March were revised lower, for instance, to offset the increase in May.

Yet overall consumer spending is still fairly strong and offers little evidence of a pending recession.

Consumers have shifted more of their spending to services. Hotel stays, airplane flights and restaurant reservations, to cite a few examples, have all returned close to prepandemic levels or better.

Key details: Sales of new vehicles and auto parts, an up-and-down category, rose 1.4% last month.

Receipts at gas stations, on the other hand, fell 2.6%, largely because of lower prices.

Retail sales were still pretty good in May, up 0.4%, if car dealers and gas stations are set aside. That gives a better idea of consumer demand.

Sales rose in every other major retail group, though the increases were mild.

One category economists watch closely is bars and restaurants, the only service sector in the retail report. Restaurant receipts increased a solid 0.4%.

Restaurant sales are also up 8% in the past year, double the rate of inflation. Americans are going out to eat in large numbers and appear likely to do so through the rest of the summer.

Restaurant sales tend to rise when the economy is healthy and Americans feel secure in their jobs. Sales backtrack during times of economic distress.

Big picture: Retail sales probably won’t show much if any improvement this year due to higher interest rates and doggedly high inflation.

The current trajectory of service spending, however, suggests the economy should continue to expand in the months ahead. Service spending accounts for two-thirds of all consumer purchases.

The bad news? The Federal Reserve is more likely to raise interest rates again if the economy doesn’t slow further. High inflation has been spawned in part by strong consumer demand.

Looking ahead: “Consumers continue to spend and as long as that’s the case it’s unlikely that inflation will come back down to [the Fed’s] 2% target,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance.

“We expect the slowdown in consumer spending to accelerate in the second half of the year as labor market gains falter, the buffer from excess savings shrinks and credit conditions tighten further,” said senior economist Lydia Boussour of EY Parthenon.

Market reaction: The Dow Jones Industrial Average
DJIA,
-0.32%
and S&P 500
SPX,
-0.37%
opened higher in Thursday trades.