US retail sales drop as inflation crimps spending

US retail sales fell in July by more than forecast, consistent with a steady shift in spending towards services and indicating consumers may be growing more price conscious as inflation picks up.

The value of overall retail purchases dropped 1.1% last month after a upwardly revised 0.7% increase in June, commerce department figures showed on Tuesday. The median estimate in a Bloomberg survey of economists called for a 0.3% decrease. Excluding vehicles, sales decreased 0.4% in July.

The data suggest that consumers are beginning to curb spending on merchandise in favour of services now that many pandemic-related restrictions have been lifted. At the same time, the emergence of the Delta variant poses a risk to economic activity and could curb demand for services such as travel and entertainment.

Higher prices for things such as groceries, meals out, personal care and apparel risk limiting discretionary spending in the coming months. A report last week from the University of Michigan showed buying conditions deteriorated to the lowest since April 2020 as inflation remained elevated. The retail sales data is not adjusted for price changes.

Economists forecast consumer spending to grow at an annualised 4.5% pace in the current period, significantly slower than the pace estimated a month ago and a sharp deceleration from the sizzling 11.8% rate seen in the second quarter.

This week includes earnings reports from major retailers, including Target and Macy’s. Earlier on Tuesday, Walmart posted stronger-than-expected comparable sales and the retail giant boosted its full-year outlook. Results from Home Depot, however, were weaker than expected, signalling a cooling in the home improvement boom.

According to the commerce department’s report, eight out of 13 retail categories registered decreases in July sales, led by motor dealers and nonstore retailers.

Sales at restaurants, the only services spending category in the retail report, rose 1.7%. Restaurant spending may soften in the coming months, depending on the path of the Delta variant. Total card spending from Bank of America decelerated at the end of July, while OpenTable restaurant bookings have moderated.

Car dealers

Motor vehicle and parts dealer sales slumped 3.9% in July after a 2.2% slide a month earlier, likely in response to limited inventory and higher prices as carmakers face supply chain constraints.

Sales at non-store retailers, which include e-commerce, fell 3.1% in July, a sharp slowdown from the prior month probably reflecting Amazon.com’s move of Prime Day — an annual sales event for online shoppers — to June.

There were also declines in sales at apparel retailers, building supply outlets and furniture stores.

So-called control group sales, which are used to calculate GDP and exclude food services, vehicle dealers, building materials stores and petrol stations, dropped 1% in July.

Bloomberg News. More stories like this are available on bloomberg.com