June retail sales show the American consumer is still spending

Following the variety of economic reports over the past month—most notably the positive employment report and the negative inflation report—the retail sales numbers for June paint another mixed picture of the economy at the end of the second quarter. Because consumers are the primary driver of the U.S. economy, we look closely at spending behaviors to forecast GDP growth, inflation, interest rates and commercial real estate performance.

According to the Census Bureau, total retail sales in June increased by 1.0% compared to a month earlier. This is a very solid monthly growth rate and it reverses the -0.1% contraction reported in May. On a year-over-year basis, retail spending was up by 8.4%, slightly higher than the 8.2% annualized gain reported last month. Driving June’s retail spending growth were sales at gas stations, e-commerce, furniture stores and restaurants. On the other side, spending fell on clothing and building material stores, the latter of which partly reflects the recent slowdown in the single-family housing market.

Of course, as the surge in spending at gas stations suggests, the retail sales numbers must be viewed in the context of the macroeconomic situation, namely multi-decade high inflation rates. In fact, if we adjust for rising consumer prices, retail sales actually declined by 0.3% compared to May 2022 and by 0.5% compared to June 2021.

If we remove spending on gas stations last month—when oil and gas prices were at their highest—nominal retail sales (not adjusted for inflation) were still in positive territory at +0.7% month-over-month and 5.1% year-over-year. By itself, spending on gas increased by 3.6% compared to last month, which is down significantly from the 5.6% monthly gain reported in May and indicates a pullback in demand for gas in view of higher oil prices. However, the recent decline in oil and gas prices should register a meaningful increase in demand this month.

All in all, the June retail spending data indicates that the U.S. consumer is still spending, but the weight of inflation continues to take a toll. The strong labor market continues to support the resilient consumer. While this is a net benefit for economic growth in the aggregate, it also suggests that the Fed will continue with its aggressive rate hiking campaign to tame inflation by slowing demand. Combining the last three major data releases—employment, inflation, and retail spending—we expect the Fed to raise interest rates by another 75 basis points at its upcoming meeting. However, a 100-basis points hike is certainly on the table.