Discerning consumers are still shopping

August 15, 2024

Retail sales surged 1.0% in July after being revised down slightly in June. The swing was driven by a surge in new vehicle sales. Spending on motor vehicles and parts alone surged 3.6% during the month, after being revised down sharply in June. A cyber attack on more than 50,000 dealers took a toll on sales in late June and pushed them into July. The rebound in vehicle spending is even larger after adjusting for inflation, as new vehicle prices continued to ease in July.

Retail sales excluding the volatile vehicle sector rose 0.4% in July, after being revised up a bit in June. Consumers spent where the price cuts were greatest, at big-box discounters and online. Traditional department stores, which have struggled more than big-box discounters, took it on the chin in July. Spending at larger discounters rose in July, while spending at traditional department stores receded.

Spending at grocery stores jumped 1% during the months as consumers shied away from dining out. The increase in spending at restaurants and bars was in line with a more subdued pace of inflation in those categories during the month.

The savings amassed by low-income households have fallen below the cash-strapped levels we saw prior to the pandemic, while over half of households, according to a recent release of consumer finances by the Federal Reserve, still have three months of expenses saved, slightly above the pre-pandemic norm. Subprime borrowers and young credit card holders have maxed out their cards and are now struggling with the rapid pace at which those cards are compounding, which is constraining additional spending. Retailers who cater to those groups have been among the fastest to start rolling back their prices and offering discounts.

On the plus side, older homeowners have increased the use of home equity lines of credit to make upgrades to homes where they are aging in place. That shift and the repairs following Hurricane Beryl helped buoy spending at building materials and garden supply stores for the second consecutive month. Spending on furniture and appliances also picked up.

The pace is still slow relative to earlier in the pandemic when home sales soared. Building materials and housing related goods tend to do better when a lot of homes are sold, as that tends to trigger more remodeling and repair activity.

We saw spending at gas stations rise slightly after adjusting for inflation. That suggests more driving vacations during the month.

The weak spots were in sporting goods stores and miscellaneous retailers, which both contracted. Everything from florists to pet stores is included in that category, which suggests the love we saw earlier in the pandemic for weddings and for our pets may be abating.

Core retail sales, which feed directly into the GDP figures, rose. 0.4%, the same as last month after revisions. That indicates that the consumer continued to rise after adjusting for inflation during the month. Consumer spending is actually poised to accelerate in the third quarter and become a driver of overall economic gains, while inventories are drained.