U.S. Retail Sales Slow as Economic Recovery Stutters

American consumers are spending less on retail products and services, as confidence in the economic recovery weakens and consumers keep their pocketbooks closed.

In total, retail sales fell 0.3% from May to June on a seasonally adjusted basis, despite expectations for a rise in spending. The Census Bureau released a new report that showed total retail spending has fallen slightly, although it remains up very modestly on a year-over-year basis. Compared to June 2014, retail sales were up 1.4% this year, although that increase was much weaker than economists’ expectations.

American consumers are spending less on retail products and services, as confidence in the economic recovery weakens and consumers keep their pocketbooks closed.

In total, retail sales fell 0.3% from May to June on a seasonally adjusted basis, despite expectations for a rise in spending. The Census Bureau released a new report that showed total retail spending has fallen slightly, although it remains up very modestly on a year-over-year basis. Compared to June 2014, retail sales were up 1.4% this year, although that increase was much weaker than economists’ expectations.

Gas Prices

A significant part of the year-over-year decline is attributable to a fall in oil prices, which have also caused gas prices to fall across the country. Excluding gasoline, retail and food service sales rose 3.5% year-over-year, but still remained negative (down 0.4%) compared to May.

Oil prices fell steeply at the end of June after recovering earlier in the year, and that late fall may have translated into healthier consumer spending on retail products excluding gasoline. Those low prices have persisted throughout July, leading some economists to believe retail sales will rebound this month relative to June.

However, the lowest prices for gasoline at the pump were seen in the U.S. back in January, when average retail prices fell to almost $2.00 per gallon. Since then prices have risen nearly 40%, although prices have fallen slightly in July relative to June.

Some economists warn that the month-over-month rise in prices from May to June, combined with the month-over-month fall in retail spending, indicates weakness in aggregate demand in the American economy. Although some models have indicated an improvement in spending as the unusually cold first quarter’s weather subsided, retail sales indicate that many Americans are reaching their spending limit.

Equity Rally

Despite the weakness, U.S. stocks had a steady rise in the morning hours after the Census Bureau’s report was released, with the Standard and Poor’s index rising over 0.4% in morning trading.

At least one investment bank told clients that the weak report is counterintuitively good for U.S. stocks, as it indicates weak demand that will force the Federal Reserve to hold off on raising rates, keeping more of the market in equities and out of U.S. Treasuries, which continue to see record demand.

Nonetheless, last week Janet Yellen reiterated her plan to raise the Federal Funds rate target later this year, possibly in September, amidst an overall improving economy. “I expect that it will be appropriate at some point later this year to take the first step to raise the federal-funds rate and thus begin normalizing monetary policy,” she said at an event in Cleveland last week, adding that “the course of the economy and inflation remains highly uncertain.”