The Current, delivered daily.
WASHINGTON (Reuters) - U.S. retail sales unexpectedly fell in May as motor vehicle purchases declined amid rampant shortages, and record high gasoline prices pulled 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. It followed in the wake of major retailers like Walmart and Target cutting their profit forecasts because of cost pressures.
Still, the weak retail sales will not divert the Federal Reserve from its aggressive monetary policy tightening path to bring inflation back to its 2% target. The U.S. central bank is expected to raise its policy interest rate later on Wednesday for a third time this year, with an increase of 3/4 of a percentage point seen as likely.
"While high personal savings and strong job and wage growth help, consumers are facing stiff headwinds from four-decade high inflation, rapidly rising borrowing costs, and the bear market in equities," said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.
"The Fed will need to see a sustained period of weakness in domestic demand and likely labor markets before breathing a sigh of relief on the inflation front."
Retail sales dropped 0.3% last month. Data for April was revised lower to show sales increasing 0.7% instead of 0.9% as previously reported. Economists polled by Reuters had forecast retail sales gaining 0.2%, with estimates ranging from as low as a 1.1% decline to as high as a 0.5% increase.
Retail sales are mostly goods, and are not adjusted for inflation. Sales rose 8.1% on a year-on-year basis and are well above their pre-pandemic trends, supported by massive savings and rising wages from a tight labor market.
The decline in monthly retail sales was led by receipts at auto dealerships, which dropped 3.5%, the largest fall in nearly a year, after increasing 1.8% in April. China's zero COVID-19 policy has exacerbated a global semiconductor shortage.
Online store sales fell 1.0%. There were declines in sales at electronics and appliance retailers as well as furniture stores. But sales at building material, garden equipment and supplies stores gained 0.2%. Receipts at sporting goods, hobby, musical instrument and book stores increased 0.4%. Clothing store sales edged up 0.1%.
Sales at services stations surged 4.0%, driven by record high gasoline prices. The national average price of gasoline jumped to an all-time high of $4.439 per gallon in May, according to data from the U.S. Energy Information Administration. Prices at the pump are now about $5 per gallon.
Excluding gasoline, retail sales dropped 0.7%. Food and beverage stores sales increased 1.2%. The National Retail Federation said the weak sales underscored the need for the White House to repeal tariffs on Chinese goods.
"Retail sales are reflecting Americans' growing concern about inflation," NRF president Matthew Shay said. "Retailers are doing what they can to keep prices down, but we continue our call on the administration to repeal unnecessary and costly tariffs on goods from China to relieve pressure on consumers."
The economy's waning fortunes were also highlighted by a separate report from the New York Fed showing manufacturing activity in New York state remained weak in June, with order backlogs declining for the first time in over a year.
Confidence among single-family homebuilders dropped to a two-year low this month, a third report showed.
Stocks on Wall Street were higher. The dollar fell against a basket of currencies. U.S. Treasury prices rose.
Services back in vogue
The decline in retail sales also reflected a gradual rotation of spending from goods to services. Receipts at bars and restaurants, the only services category in the retail sales report, increased 0.7% last month.
"It's possible consumers reached a saturation point for goods spending and are now shifting towards higher leisure spending heading into the summer months," said Will Compernolle, a senior economist at FHN Financial in New York.
Excluding automobiles, gasoline, building materials and food services, retail sales were unchanged in May. Data for April was revised down to show these so-called core retail sales increasing 0.5% instead of 1.0% as previously reported.
Core retail sales correspond most closely with the consumer spending component of gross domestic product. While consumers are spending more on services, May's weak retail sales and the downward revisions to April data suggested consumption was slowing in the second quarter. Retail sales account for about a third of consumer spending.
JPMorgan slashed its second-quarter GDP estimate to a 2.5%annualized rate from a 3.25% pace. The economy contracted at a 1.5% rate in the first quarter. Citigroup, however, cautioned that retail sales were likely overstating the degree of slowdown in consumption.
"Total consumption data released at the end of the month will likely continue to show that some of the slowing in goods spending reflects a shift back towards services spending," said Veronica Clark, an economist at Citigroup in New York.
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)
Trending in Economy
On average, customers spend $59 more than the value of their gift card, Fiserv found.
In retail, sales are often measured in goods, whether they are purchased for ourselves or someone else. There are plenty of strategies that brands and retailers use to increase those sales, whether it is marketing, loyalty programs or how that item is presented.
In most cases, these are two different parts of the equation for retailers: The product that is bought and the strategies that lead to the purchase.
That’s what makes the gift card unique.
It is an item you can buy, with a section in the store all its own. Eventually, it leads to the purchase of other goods, so the gift card is leads to a direct sale. Yet it’s also a means to build a retail brand and create incentives that both introduce customers to a store and keep them coming back.
That’s a key takeaway from the 20th Annual U.S. Prepaid Consumer Insights Study from fintech and payments company Fiserv.
At this point, the gift card feels like a staple of the shopping experience. But it is only about 30 years old. In 1994, Blockbuster Video pioneered the sale of cards for gifted purchases directly as a means to combat fraud in paper gift certificates. Since then, they’ve proven to have a multitude of uses that stretch beyond the holidays.
Starbucks and Amazon gift cards are commonly distributed as prizes at team-building events and as pick-me-ups by friends showing they care. In 2022, 60% of consumers said they received a gift card from an employer, according to the Fiserv report. That was a big increase from 32% in 2019. People appreciate the gesture. The survey found that 85% of employees think that gift cards from an employer make for appropriate incentives.
For people looking to show generosity, gift cards can also be a means to stretch dollars. At a time of high inflation, people are looking for deals with their discretionary purchases. Gift card promotions that offer discounts and bonuses are proving particularly popular, the study found. Two-thirds of consumers said promotions can influence them to purchase more, while more than half of consumers took advantage of such an offer in 2022.
Yet the more difficult consumer environment is also having an impact on overall gift card sales. In 2022, the growth of gift card purchases slowed.
“Overall, 56% of U.S. consumers purchased more gift cards in 2022 compared to 2021,” said Tom Niedbalski, VP of gift solutions at Fiserv. “This was a decline from the 73% of consumers who said they bought more gift cards in 2021 than they did in 2020.”
Inflation and less discretionary income were the driving factors for consumers who said they bought fewer gift cards during 2022, as 35% of consumers said inflation was the reason they were purchasing fewer cards.
It's important for brands and retailers to understand why consumers buy gift cards. But it's just as crucial to understand where they can fit in retail strategy. Beyond sales, gift cards can help drive repeat customers, and extend a brand. These tools are particularly valuable at a time when retailers are focused on profitability in a tougher consumer environment.
Fiserv explained four areas in which gift cards are of particular value for brands.The following is directly quoted from Niedbalski:
Improving cash flow and revenue. Gift cards not only drive in-store and online traffic, there is an associated “lift,” or overspend, when a gift card is converted into a sale. On average, customers spend $59 more than the value of their gift card.
Repeat customers. Retailers use gift cards to foster loyalty and customer engagement, ultimately leading to repeat customers. One way we see this play out is through promotions associated with gift card sales. For example: a consumer who buys a $100 gift card for the holidays will receive a $20 bonus card that can be used after January 1 – creating a pre-holiday sale and post-holiday transaction in the New Year.
Branded currency. A gift card places a merchant’s brand directly into the consumer’s wallet, increasing brand awareness and ensuring the merchant’s brand is with the consumer when they are looking to buy.
Year-round marketing. The gift card has grown beyond the traditional holiday season. From birthdays and graduations to anniversaries and babies, gift cards are becoming the most popular way to recognize milestones – giving retailers opportunities to run additional promotions throughout the year.