Retail Sales Fall 0.9% in June

One month does not make a trend, but June retail sales are definitely lower. Retail Sales make up about half of the personal consumption expenditure (PCE) used in the GDP numbers. I appears that the discretionary spending of the consumer is beginning to suffer as a result of higher gas and food prices. The comments below are from Market Watch, which contains a lot more detail. The original press release is from the Census Bureau, just in case you want to do your own interpretation.

With weak demand for durable goods and falling gas prices, U.S. retail sales dropped 0.9% in June, the largest decline since August 2005, the government said Friday.

Excluding auto sales, retail sales dropped 0.4%, the largest decline since last September. Economists were expecting a 0.2% gain excluding autos.

In the past year, retail sales were up 3.8% before adjusting for inflation. Excluding autos, sales were up 4.2% compared with a year earlier.

Sales rose 1.5% in May and fell 0.3% in April.

With sales falling in two of the three months of the second quarter, economists are looking for a sharp slowdown in real consumer spending, adjusted for inflation. After growing at a 4.2% annual pace in the first quarter, real consumer spending could slow to about a third of that growth pace. That is 1.4%, which is substantially below the 3% growth rate that many define as a minimum to be healthy. (my emphasis)

The question for the Federal Reserve and financial markets is, as always, what will happen next. For consumer spending, much depends on the health of the labor market to deliver income growth to offset both higher prices and the loss of home equity wealth, as well as the willingness and ability of consumers to take on more debt to maintain consumption. Consumers have been spending more than their take home pay for 27 months.

The weekly snapshots of retail sales "early July has been even worse," wrote Ian Shepherdson, chief U.S. economist for High Frequency Economics, in an email.