Retail sales a mixed bag in July, but lower prices should be on the way

With the drop in gas prices in July, it was going to be interesting to see how consumers reacted to that, and what happened to their spending. And a report from (Wednesday) seems to be evidence that Americans picked up their shopping in other areas.

U.S. retail sales were unexpectedly unchanged in July as falling gasoline prices weighed on receipts at service stations, but consumer spending appeared to pick up at the start of the third quarter, further assuaging fears the economy was in a recession.

Declining gasoline prices, however, freed up money for spending on other goods, including furniture, electronics and appliances, as well as building materials and garden equipment….

Last month's flat reading in retail sales followed a downwardly revised 0.8% increase in June. Retail sales in June were previously reported to have advanced 1.0%. Economists polled by Reuters had forecast that sales would gain 0.1%, with estimates ranging from as low as a 0.3% decline to as high as a 0.9% increase. Sales rose 10.3% on a year-on-year basis in July.

Retail sales are mostly goods and are not adjusted for inflation. The retreat in gasoline prices from record highs in July resulted in goods prices falling 0.5%. That means inflation-adjusted retail sales increased 0.6% last month.

The June downward revision is a bit of concern, but “core” retail sales in July (which excludes care-related sales and purchases at gas stations) jumped by a healthy 0.7%.

Much of that was driven by a big increase in Non-Store (Amazon and other online-only) retailers, and an increase in building supply/garden store sales (although it’s actually lower-than-normal Summer declines).

Biggest gainers, Retail sales report July 2022
Non-Store Retailers +2.7%
Building materials/garden stores +1.5%
Misc. Retailers +1.5%

That’s a similar trend to what we saw as the COVID World first set in, as people spent more time at home and bought items to fix up their homes. But furniture (+0.4%) and electronics/appliance stores (+0.2%) didn’t see the large jumps that those places had in 2020, so I don’t think there's been that much of a reversion to spending habits of 2020 and early 2021.

What also didn’t rise much is spending at grocery stores, despite “food [to be used] at home” prices going up another 1.0% in July. The sales increase for July at food and beverage stores was only 0.2%, and their 8.4% increase in sales over the last 12 months is well below the 13.1% increase in prices for “food at home” in that time. This indicates to me that there is some kind of “downshifting” in what Americans are buying (or how much they are buying) that the CPI report doesn’t account much for.

In previous months, this trend had been offset by noticeably higher sales at bars and restaurants. But that's been leveling off a bit in recent months.

To be fair, this could be a seasonal blip, as the Census Bureau’s models count on a sizable increase in bar/restaurant spending in July (July 2022 had a 3% increase in raw sales vs June).

I also want to note the sales at big box stores, which are telling a story that is similar to what grocery stores are seeing. People are limiting their spending there, while non-store retailers are continuing its impressive COVID-era rise in sales.

It means that people aren’t spending as much at your Sam’s Clubs and Costcos, and it seemed to be resulting in a large increase in the inventory-to-sales ratios at several types of stores as we hit the halfway point of 2022.

In theory, this higher inventory should lead to some lower prices for consumers to take advantage of, and will lessen inflation. And we should ask some serious questions if that doesn’t prove to be the case in the next couple of months.

I think this retail sales report is fine, although a bit uneven. With gas prices going even lower in August, let’s look and see if more of an adjustment was made by Americans into other types of spending, and if back-to-school sales come in strong as a result.

If so, I think that can put any type of “recession” concern to bed, and that our bigger worry should be in figuring out how we can continue to staff all these stores to keep up with the demand in a time of multi-decade lows in unemployment.