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Retail sales fell more than expected last month, the Commerce Department reported Tuesday, a sign of the uneven recovery of the U.S. consumer and a shift in spending patterns as the country reopens after the coronavirus pandemic.
The 1.3 percent drop in May follows months of ups and downs in retail spending.
After falling to record lows about a year ago, sales rebounded sharply this spring, only to fluctuate from month to month, driven by the ebb and flow of government stimulus and the ongoing virus. April data was revised Tuesday to show a 0.9 percent increase.
Still, economists said the broader recovery remained on track. Rather than signaling a fundamental weakness, spending data from recent months shows that consumers likely spent everything they need to furnish their homes or upgrade their phones during the home-bound months of the pandemic. Now they are shifting their purchases to restaurants, lodging and travel as vaccination rates rise and people feel safer getting out and about.
The drop was a bit of a shock, said Beth Ann Bovino, chief US economist at S&P Global. But there are reasons why I am not concerned.
First, buying has risen to record levels in recent months and far exceeds what consumers were spending before the pandemic, Ms Bovino said. Another factor that weighed on spending last month was the limited supply, especially of cars. Car sales fell 4 percent in May. Vehicle production has been slowed by a lack of semiconductors, part of a global supply chain problem affecting a range of products such as Starbucks coffee flavors and wood. But government data this week also showed that car production increased in May as supply chain problems eased, which should lead to more sales this summer.
Tuesday’s retail sales report also doesn’t reflect spending on travel and hotels, although credit and debit card data shows those sectors recovered significantly in May. According to an analysis by Bank of America, consumers spent 16 percent more on overnight stays over the Memorial Day weekend than during the holidays in 2019.
Economists say consumers are experiencing a spin from their unusual pandemic spending pattern. It started in the lockdown months of the pandemic with huge jumps in grocery purchases and plummeting restaurant revenues. As time went on at home, many people took on renovation projects, improving their furniture, and enjoying themselves with new electronics and sporting goods.
Last month showed another shift. Furniture spending fell 2.1 percent, while purchases of electronics and appliances fell 3.4 percent. Purchases at restaurants and bars increased by 1.8 percent. Consumers spent more on clothing and accessories in the past month, in part due to the need to dress to return to offices that have gradually reopened after months of remote work. Department store sales rose 1.6 percent.
With so many caveats in the retail sales report, Ian Shepherdson, chief economist at the Pantheon Macroeconomics, said the data wasn’t as helpful in assessing consumers’ true health.
The drop in headlines in today’s numbers tells us nothing about the future, wrote Mr. Shepherdson in a research note.
Yet much is riding on the American consumer, which has been the engine of the nation’s wider economic recovery. Any deviation from policymakers hoping that retail sales will continue to rise steadily as the country reopens and more people are vaccinated is surprising to economists.
The federal government has spent more than $1 trillion during the pandemic to ensure Americans continue to spend and to prevent stores and restaurants from closing during the lockdowns.
The incentive payments have paid off in many ways. Spending last month was about 18 percent above prepandemic levels. Economists are now looking at whether the end of the stimulus money, the last checks sent out in mid-March, will lead to less spending.
The Federal Reserve will release its policy statement and economic projections for June on Wednesday, followed by a press conference with central bank chairman Jerome H. Powell. He can provide an updated assessment of inflation, the labor market and the overall economic recovery after a series of surprising data, such as retail sales in recent months.
The meeting and the comments will be watched closely by investors, who are looking for a hint that the Fed is preparing to slow its $120 billion in monthly government-backed bond purchases, a policy designed to help the economy. by keeping many types of loans cheap.
Ms Bovino of S&P Global says one of the biggest tests for the recovery will come this fall, when unemployment benefits end and schools reopen, allowing parents to return to work. Then it will become clear whether the stimulus-fueled retail spending translated into sustainable job growth and business creation.
Another risk is that these early signs of inflation, largely caused by supply problems, will become more acute, prompting consumers to withdraw.
But most economists are optimistic that spending will remain on an upward trajectory. Gus Faucher, chief economist at PNC Financial Services Group, predicted Tuesday that retail sales will grow at a moderate pace for the foreseeable future, as many U.S. consumers were in good financial shape on balance.
The positives of household savings, normalizing supply chains, rising wealth from higher stock prices and home values, an improving labor market and low interest rates outweigh the negatives of higher prices and depleted demand, he said.
Jeanna Smialek reporting contributed.
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