Tuesday, August 15, 2023
KEY TAKEAWAYS
- Amazon Prime Day in mid-July temporarily boosted overall spending last month.
- Auto sales revenue fell in July as vehicle prices declined, which provided a bit of a respite for consumers.
- It seems that online promotions and excess savings buoyed retail activity in July but consumers are quickly depleting those excess reserves and using credit to support spending habits.
- Today’s retail sales data do not support any material change in expectations for the next Federal Reserve (Fed) meeting. We expect the Fed to pause next month as inflation eased in recent months.
OVERVIEW
Headline retail sales rose 0.7% month-over-month (m/m) in July after rising 0.3% m/m in June. Much of the monthly rise was from the temporary boost from online promotions in the middle of the month. Retail sales figures are nominal, meaning they are not adjusted for inflation and mostly covering physical goods so investors must wait until the more comprehensive personal spending report for a snapshot including services spending. The personal income and spending data will be released on August 31.
As shown in the chart below, the pandemic accelerated the shift toward ecommerce and Amazon Prime Days are an added boost. Online shopping rose 1.4% m/m for the second consecutive month, the fastest monthly pace of sales since December. Annual growth rates for non-store retailers showed consumers’ healthy appetite for online shopping compared to general merchandise stores.
The control group – which excludes autos, gas, and building materials and feeds into the GDP calculations – rose 1% m/m as the consumer spending splurge continued into the start of Q3. As a result of this report, the Atlanta GDPNowcasting model rose to over 4%. Even though this model often overshoots the actual data, investors should not completely ignore the fact that so far, consumer spending puts Q3 GDP growth on a decent clip. Given the rise in credit card balances, the consumer spending splurge will likely end when the credit card bill comes due.
Today’s retail sales report is mostly focused on goods spending so the Personal Consumption Expenditures (PCE) report in a few weeks will likely show the strong appetite for services. Looking ahead, investors should be mindful of the early warning signs that should show waning demand for services such as travel and hospitality.
SUMMARY
It seems that online promotions and excess savings buoyed retail activity in July but consumers are quickly depleting those excess reserves and starting to use credit to support spending habits. Yields on both 2-year and 10-year Treasuries moved a bit following this morning’s report but the sales data do not support any material change in expectations for the next Fed meeting. We expect the Fed to pause next month as inflation eased in recent months.
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