Consumers have continued to power through the summer.
July retail and food service sales rose 3.2 percent from a year ago as sales at apparel and accessories specialty stores increased 2.2 percent, according to the U.S. Census Bureau’s latest reading of sales.
Still, the gains were not universal. Department stores saw sales slip 3.4 percent, but given the breadth of the movement higher, that could be a statistical anomaly or say more about department stores than the consumer at large.
The biggest gains came from non-store retailers, a category dominated by e-commerce players, which rose 10.3 percent for the month with a boost from Amazon’s Prime Day shopping bonanza.
While the overall year-to-year gains for the month keep retail sales in line with inflation, which according to the Consumer Price Index also increased 3.2 percent in July, the result still ended up surprising.
Seasonally adjusted sales, which gauge the change in retail momentum between June and July, showed an across-the-board increase of 0.7 percent, well ahead of the 0.4 percent increase forecast by economists, according to FactSet.
“Households are in extraordinarily good financial shape,” said Stephen Stanley, chief U.S. economist at Santander. “Even now, liquid assets remain elevated by a huge margin relative to pre-pandemic norms. On top of that, a vibrant labor market is generating robust real income gains. Until one or both of those forces shift, there is every reason to believe that consumer demand will continue to rise at a healthy clip.”
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Consumers built up excess savings as they stayed closer to home during the COVID-19 pandemic and are now burning through that cash.
How long that lasts is an open question — economists project the excess could run out sometime around the end of this year. But in the meantime the read on inflation in the broader economy is becoming more complicated.
Michael Zdinak, director U.S. consumer markets service at S&P Global Market Intelligence, said: “Strong growth in real spending, following the low read on inflation in July, is good news for retailers, though bad news for policymakers who are hoping for a soft landing. People still have jobs, incomes are growing, and spending continues despite the rise in interest rates. Going forward, inventory buildup this summer has lagged, meaning if demand picks up, prices could as well.”
The Federal Reserve has been raising interest rates to fight higher prices, but the risk is that policy makers will overdo it and, given the lagging impact of rate hikes, push the economy into a recession, albeit later than many expected.
“Economic growth over the first half of the year has surprised almost everybody,” said Dr. Evan Barrington, vice president of economic analysis and forecasting at TraQline, a leader in consumer insights and market research. “So far in 2023, real GDP has grown by 2.0 percent in the first quarter and 2.4 percent in the second quarter. Most economists view the trend potential for the economy at around 2 percent.
“At the beginning of the year, the consensus was that growth would decline and GDP would be negative over the first half of the year,” he continued. “To that end, the current strong momentum comes as a big surprise—but now the key question is what happens going forward?”
A soft landing would have inflation coming down to the 2 percent target rate without a recession.
That makes the impact of the summer sales days all the more important to the outlook for the economy.
“Retail sales growth has been slowing, but July got a midsummer boost from special deal days offered by multiple retailers,” said Jack Kleinhenz, chief economist at the National Retail Federation trade group. “Households had a positive response, and the pace of sales was clearly helped, more than doubling the previous monthly gain. The data shows the ongoing resilience in consumer spending and how it is fueling the overall economy. It’s worth noting that the strong year-over-year gain came partly because sales accelerated this July but were decelerating at the same time last year.”
Amazon said last month that over the course of its two-day Prime Day sale more than 375 million items were purchased globally with $2.5 billion-plus saved on deals.
July 11, which kicked off Prime Day, ranked as Amazon’s single largest sales day ever.