U.S. retail sales stumble as inflation bites

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By Lucia Mutikani

WASHINGTON (Reuters) – U.S. retail sales fell unexpectedly in May as purchases of motor vehicles fell amid widespread shortages and record gasoline prices pushed spending away from other goods .

The first drop in sales in five months reported by the Commerce Department on Wednesday also suggested that high inflation was starting to hurt demand. This followed the wake of major retailers like Walmart and Target which cut their profit forecasts due to cost pressures.

Weak retail sales did not distract the Federal Reserve from its aggressive monetary tightening policy to bring inflation back to its 2% target. The U.S. central bank raised its key rate by three-quarters of a percentage point, the biggest hike since 1994. [nL1N2Y12O3]

“While high personal savings and strong job and wage growth are helping, consumers are facing strong headwinds from four-decade high inflation, rapidly rising borrowing costs and the equity bear market,” said Sal Guatieri, senior economist at BMO Capital Markets in Toronto.

“The Fed will have to see an extended period of weakness in domestic demand and likely in labor markets before breathing a sigh of relief on the inflation front.”

Retail sales fell 0.3% last month. April’s data has been revised down to show sales rose 0.7% instead of 0.9% as previously reported. Economists polled by Reuters had forecast retail sales to rise 0.2%, with estimates ranging from a 1.1% decline to a 0.5% increase.

Retail sales are primarily goods and are not adjusted for inflation. Sales rose 8.1% on an annual basis and are well above their pre-pandemic trends, supported by massive savings and rising wages thanks to a tight labor market.

The drop in monthly retail sales was led by revenue at auto dealers, which fell 3.5%, the biggest drop in nearly a year, after rising 1.8% in April. China’s zero COVID-19 policy has exacerbated a global shortage of semiconductors.

Online store sales fell 1.0%. Sales at electronics and appliance retailers as well as furniture stores fell. But sales at building material, equipment and garden supply stores rose 0.2%. Receipts at sporting goods, hobby, musical instrument and book stores rose 0.4%.

Clothing store sales edged up 0.1%. Sales at food and beverage stores rose 1.2%. Sales at gasoline stations jumped 4.0%, boosted by record gasoline prices. The national average gasoline price hit an all-time high of $4.439 a gallon in May, according to data from the US Energy Information Administration. Prices at the pump are around $5 a gallon.

Excluding gasoline, retail sales fell 0.7%.

The National Retail Federation said the weak sales reflected growing consumer concerns about inflation and underscored the need for the White House to remove tariffs on Chinese goods.

“Retailers are doing what they can to keep prices low, but we continue to call on the administration to repeal unnecessary and costly tariffs on goods from China to relieve pressure on consumers,” said NRF President Matthew Shay.

The waning fortunes of the economy were also highlighted by a separate report from the New York Fed showing that manufacturing activity in New York State remained weak in June, with

order books down for the first time in over a year.

Single-family homebuilder confidence fell to its lowest level in two years this month, according to a third report.

Stocks on Wall Street were higher. [.N] The dollar appreciated against a basket of currencies. [FRX/] US Treasury prices rose. [US/]

SERVICES ARE BACK IN Vogue

The decline in retail sales also reflects a gradual shift in spending from goods to services. Revenue from bars and restaurants, the only service category in the retail sales report, rose 0.7%.

Data from freight forwarding and customs brokerage firm Flexport suggests that consumer preferences for goods may fall back to levels seen in the summer of 2020 in the third quarter of this year.

“Consumers may have reached a saturation point for spending on goods and are now turning to higher leisure spending as the summer months approach,” said Will Compernolle, senior economist at FHN Financial. At New York.

Excluding automobiles, gasoline, building materials and food services, retail sales remained unchanged in May. April’s data has been revised down to show that these so-called core retail sales rose 0.5% instead of 1.0% as previously reported.

Core retail sales correspond most closely to the consumer spending component of gross domestic product. As consumers spend more on services, weak retail sales in May and downward revisions to April data suggest consumption slowed in the second quarter.

The Atlanta Fed cut its second-quarter GDP estimate to zero from an annualized rate of 0.9%. JPMorgan lowered its forecast to a rate of 2.5% from 3.25%. The economy contracted at a rate of 1.5% in the first quarter.

But with retail sales accounting for about 40% of consumer spending, they may overestimate the degree of consumption slowdown.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Nick Zieminski)

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