Retail sales rose by 0.7% in July, easily topping expectations for a 0.3% increase from the prior month. Excluding sometimes volatile vehicle and gasoline sales, sales rose by an even stronger 0.9%. Over the past year, retail sales growth increased by 3.4%.
The gain can be traced in part to the promotions offered by major retailers, including Amazon and its competitors. These summer Black Friday deals resulted in a strong month for purchases, but may only be temporary in nature.
Even so, the solid July results for retailers should provide at least a modest lift to the recently downtrodden mood on the economy. Rising recession risk has hammered the stock market in recent days, as investors sought safety in bonds, driving long-term yields to exceptionally low levels.
Overnight, the 30-year Treasury yield dipped below 2% for the first time, while the spread between the 2-year and 10-year remained near zero, following on a brief inversion earlier in the day that spooked the markets. An inverted yield curve is viewed as an early warning signal of recession, which has historically typically followed within a few years.
The retail sector has been hit hard in recent days on earnings misses and a dimming outlook. Although the headline growth numbers for the month were strong, the report also clearly illustrated the changing face of the retail sector and the evolution of consumer spending habits. Nonstore retailers – a segment dominated by online retailers – posted a strong 2.8% gain for the month and a 16.0% gain over the past year.
Contrast that with traditional bricks-and-mortar stores, which experienced mixed results. Retailers specializing in electronics, clothing, sporting goods, hobbies, and building materials all lost ground in the past year. It’s clear that the evolution of consumer spending habits continues to change the face of the retail sector, with clear winners and losers.
Despite the sharp increase in economic uncertainty, the consumer sector remains a relative bright spot for the economy. With growth driven largely by household spending, a robust labor market and solid consumer sentiment should continue to provide a balance to the factors negatively weighing on the economy. So far, consumers have done enough to keep the economic scale balanced. Still, household spending warrants watching as any sustained deterioration in spending could tip the scale in the wrong direction.
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