After a stretch of wildly positive economic surprises, the latest US retail sales data felt like more of a mixed bag: the top-line number missed forecasts and, partially in response, stocks drifted aimlessly between losses and modest gains. But in an environment in which Federal Reserve Chair Jerome Powell is trying to cover the “last mile” in the inflation fight, a middling consumption environment may be just what the economy needs.
Consider the underlying crosscurrents in the report. Overall, retail sales rose just 0.2% from the previous month, missing the consensus forecast for a 0.5% increase. But some of the miss came from weaker-than-expected auto sales, which in turn seemed to reflect pricing more than volumes. As an earlier report from Wards showed, sales of new light vehicles climbed 0.6% last month to a 15.7 million annualized pace, but it happened amid a third month of new-car deflation.
Overall, consumption is nowhere close to collapsing, and the best place to see that is in the report’s so-called control group — which excludes idiosyncratic cars, fuel, food service and building materials. The control group rose at a 0.6% pace month-on-month pace, beating expectations and keeping the medium-term trend in line with the pre-pandemic normal.
That’s more than just inflation. Core goods inflation has been retreating for much of the past year, but control group retail sales have refused to crumble in a sign that the consumption bedrock of the US economy remains reasonably sturdy.
The star of Tuesday’s report was online “nonstore” retailers, which experienced a seasonally adjusted 1.9% jump in June, a positive omen for Amazon.com Inc. The company, the country’s largest online retailer, boomed during the Covid-19 pandemic, struggled with the 2022 pullback in goods spending and now seems to be recapturing some of its momentum as inflation retreats. As it turns out, many of the pandemic-era changes in shopping habits are exhibiting some staying power.
Amazon has ramped up its supply chain and logistics network to get customers their goods faster. It changed its inventory model from a national fulfillment network to one that is more localized around eight interconnected regions in smaller areas. It launched a new inventory software for its online sellers and has continued to invest in logistics robotics at its warehouses. It also now has a minority stake in Hawaiian Airlines to operate 10 freight planes beginning this fall.
It also looks as if electronics and home decor spending may have hit bottom.
Nominal retail sales climbed 1.3% from the previous month for home furnishings, electronics and appliances, which brought the three-month, six-month and 12-month rates of change higher. No one’s popping champagne in the downtrodden durable goods business — it’s a flattening trend, not a new boom — but at least it looks as if that corner of retail may have put the worst behind it.
Retailers like Best Buy Co. and Williams-Sonoma Inc. have been struggling through a massive drop-off in spending after shoppers held off on adding to their home offices and buying new couches. Williams-Sonoma and Restoration Hardware Inc. have resisted widespread discounting to clear inventory and are still experiencing demand for smaller goods like throw blankets, kitchen appliances and picture frames. Meanwhile, Best Buy has been on a discount swing that has eaten away at margins, though Chief Executive Officer Corie Barry assured investors in an earnings call last month that this year will be the “bottom in tech demand.” It looks as if she might be right.
All of this is consistent with the elusive “soft landing” economy that optimists have been starting to celebrate in recent weeks (admittedly, perhaps still a little early). Even as data show that inflation endures, consumers continue to open their wallets and spend consistently — but not with reckless abandon. With Fed policymakers still obsessed with covering the inflation fight’s last mile, that’s precisely the sort of nuance that they would hope to see.
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