July retail sales: consumers party on, for now

 

 - by New Deal democrat

As per usual, retail sales are one of my favorite economic indicators, because in the past they have told us a lot about both where the economy is at present, and because consumption leads employment, so much about where the economy is likely to be in the near term future.

 The news in July was good, as nominally retail sales rose 0.7%. Additionally, June was revised higher, from 0.6% to 0.9%. Because consumer prices rose 0.3% in each of these months, that means real retail sales rose 0.6% in June and - after rounding - another 0.3% in July.

This suggests that after front-running tariffs in March and April, and then pulling back in May, consumers resumed normal activity in June and July, which is all good (just in time for the Administration to institute more tariffs in August). Here’s the graphic look, showing that in real terms August was only surpassed by March and last December:

The above graph also shows real personal spending on goods (gold, right scale), which is a broader measure and tends to shy age in similar fashion to retail spending, but won’t be reported until the end of this month.

Further, with several exceptions, most notably in 2022-23, in the past 75 years whenever real retail sales turned negative YoY, a recession was about to begin or had just begun. At present real retail sales are higher YoY by 1.2%, so there is no sign of any imminent downturn in the economy:

Finally, because consumption leads employment, here is the updated graph of real retail sales YoY, together with real personal consumption of goods compared with nonfarm payrolls (red):

Based on historical experience, real retail sales suggest that YoY jobs growth should continue to decelerate slowly in the coming months to 0.6%, which (although I won’t bother with a graph this month) in the past 40 years has only occurred during recessions.

The fly in the ointment, of course, is tariffs. Via Scott Linicome, Goldman Sachs’ preliminary analysis is that the majority of tariff price increases - 64% - have so far been eaten by US importers. Another 14% were eaten by foreign exporters. Only 22% have been passed through to US consumers. And unsurprisingly US producers whose foreign competitors have had to raise prices have taken advantage of the situation to raise their prices as well.

The above situation isn’t going to last forever. With average hourly wages having risen on average about 4% YoY recently, any price increases beyond those are going to lead to a downturn in consumption. So the big danger is still out there. It just hasn’t arrived at consumers’ doors yet.