US retail sales highlights consumer caution

US retail sales fell 0.9% month-on-month in May, a weaker outcome than the -0.6% MoM figure predicted by the market. April's figure was also revised lower to a -0.1% MoM contraction from the initially reported +0.1% MoM outcome.

This was largely a weak autos (-3.5%), building materials (-2.7%) and gasoline (-2%) story with clothing (+0.8), miscellaneous (+2.9%) and non-store retail (+0.9%) performing better. Tariff front running led to a surge in auto sales in March, but this has now completely reversed. The chart below shows different retail sales component levels indexed to 100 for February 2020 and highlights how dominant non-store (internet) retail has become in terms of being the source of retail spending growth.

The control group, which excludes volatile items such as gasoline, autos, food service and building materials wasn't as bad, posting a 0.4% MoM increase after a 0.1% decline in April. This metric has historically been more aligned with broader consumer trends, including services, and offers some hope that the second quarter won't be a write-off for consumer spending – note the chart below shows that retail sales accounts for only 42% of total consumer spending.

In aggregate today’s report is disappointing since we have to remember that these are all nominal dollar growth rates. In price adjusted volume terms (which is what GDP is measured in) it paints a weak picture that reflects subdued consumer confidence readings. Households are nervous that tariff-induced price hikes will squeeze spending power while respondents have become much more cautious on job prospects and this suggests that consumer spending will continue to cool through this year.