Retail Sales Rise Unexpectedly in May

“May’s retail and food services sales report was much stronger than expected and continued to point to the staying power of the American consumer, something that tends to support the Federal Reserve Chairman’s concern regarding inflation,” wrote Raymond James Chief Economist Eugenio Alemán.

Excluding auto and fuel, sales rose 0.4% in May, in line with expectations.

Indeed, gasoline stations were some of the only stores to mark monthly declines, with spending down 2.6% from April. Economists had predicted weakness in gas spending, driven largely by this year’s gradual decrease in gas prices—but few expected the overall report to be this strong. Ahead of the report, many analysts pointed to slowing foot traffic trends and bank credit-card data as evidence that consumers were pulling back.

That wasn’t the case. Spending was strong across most categories, notching monthly declines only at gas stations and miscellaneous store retailers.

The biggest spending increases were at building material and garden suppliers, up 2.2%, and motor vehicle and parts dealers, up 1.4%. Even furniture and electronics stores—which have seen weak spending trends in recent months—gained in May, up 0.4% and 0.2%, respectively.

Granted, some of that increase “reflects inflation trends as much as it reflects consumer spending,” said Claire Tassin, retail and e-commerce analyst at Morning Consult. The retail sales figures aren’t adjusted for inflation, which rose 4% in May.

While the retail sales report always draws market attention, May’s data will be scrutinized even further for any “green shoots,” given that “the consumer is the only hope for a U.S. economic recovery,” wrote Louis Navellier, chief investment officer of Navellier, ahead of the report.

Signs that consumers are holding on despite a slowing macroeconomic environment are a positive sign for retailers and other consumer-facing industries. But it won’t likely be received well by the Fed. The central bank has been raising interest rates for over a year in a bid to stifle consumer demand and tame inflation. The efforts seem to be working, with May’s 4% CPI reading marking a deceleration from April’s 4.9% increase. May’s stronger-than-expected retail sales report suggests there’s still work ahead for the Fed.

“We think the economic data will support a persistent pause by the Fed through year-end, but there’s a real risk that policymakers will restart rate hikes in [the second half] if the upcoming economic data don’t point to a cooldown,” wrote Oren Klachkin, lead U.S. economist at Oxford Economics.

On Wednesday, Fed officials chose to hold the benchmark interest rate steady, marking the first time in 15 months that it has skipped a rate increase. Fed Chairman Jerome Powell indicated the central bank has largely written off cutting rates anytime this year and is still considering increasing rates further if necessary.

“Inflation has not really moved down—it has not so far reacted much to our existing rate hikes,” Powell said in remarks on Wednesday.

The stock market didn’t have a strong positive reaction to the news, as investors digest the Fed’s decision to hold rates steady. The
S&P 500
was down 0.2% in early Thursday trading, while the
Nasdaq Composite
was off 0.4%.

Write to Sabrina Escobar at [email protected]