Retail sales strong, outside of cars and sectors helped by COVID

As the economy continued to reopen in June, it was reflected in a good retail sales report that came out late last week.

Retail sales rose 0.6% last month. Data for May was revised down to show sales falling 1.7% instead of declining 1.3% as previously reported. Economists polled by Reuters had forecast retail sales dropping 0.4% in June.

Sales advanced 18.0% compared to June last year and are now 18.0% above their pre-pandemic level. Retail sales mostly capture the goods component of consumer spending, with services such as healthcare, education, travel and hotel accommodation making up the remaining portion. Restaurants and bars are the only services category in the retail sales report.

Demand shifted to goods like electronics and motor vehicles during the pandemic as millions of people worked from home, took online classes and avoided public transportation. Spending is now rotating back to services like travel and entertainment.

You can really see this over the last 2 months inn particular. Some sectors that had huge jumps in activity in the COVID World, have seen their sales revert down toward a more normal level of activity. Likewise, you can see where bars and restaurants continued to recover in June after being devastated in 2020 and early 2021.

The drop in autos stands out to me, as that sector had great growth for about a year starting in Spring 2020, but has had significant drops in sales over the last 2 months. Reuters talked to an economist to find out why that might be happening.

The rebound in sales reported by the Commerce Department on Friday was despite purchases of motor vehicles declining for a second straight month due to a lack of supply caused by a global semiconductor shortage. Sales were also flattered by higher prices resulting from supply constraints as COVID-19 vaccinations, low interest rates and massive fiscal stimulus fuel demand.

"Growing pains from reopening are on the supply side," said Chris Low, chief economist at FHN Financial in New York. "Inflation reports earlier this week confirm firms are still struggling to keep up with this demand, but another month of high retail spending should give companies confidence that consumer demand is not slowing down anytime soon."

I'm not as certain about that, as prices of new cars and trucks have gone up by 5.3% in the last year, and used vehicles are up more than 45% in the last year. Makes you wonder what ends first in the auto sector- the lack of supply or the lack of sales.

Conversely, retail sales grew by an impressive 1.3% outside of autos, so everyday consumer spending seems to have been strong as the 1st half of 2021 finished up. But on the same day of the retail sales report, we also got news of a surprise drop in consumer sentiment, with inflation fears being the main reason. Now, does that along with a resurgence of COVID infections, translate into a slowing down of the Biden Boom that has characterized the US economy in the last few months?

Let's keep an eye on July's reports, to see if there's any slowdown in growth from these factors. And let's see which sectors may get hurt more if prices and COVID cases continue to rise for the rest of the Summer. Or if some sectors boom even more if supply constraints of both materials and labor get cleared over the coming months.