Retail sales fell more than expected last month, the Commerce Department reported Tuesday, a sign of the uneven recovery of the American consumer and a shift in spending patterns as the country reopens after the coronavirus pandemic.
The 1.3% decline in May followed months of ups and downs in retail spending.
After falling to record lows about a year ago, sales bounced back sharply this spring, only to swing from month to month, driven by the ebb and flow of government stimulus and the persistence of the virus. The data from April was revised Tuesday to show an increase of 0.9%.
Still, economists said that the broader recovery remained on track. Rather than signaling a fundamental weakness, last month’s spending data shows that consumers have most likely spent all they need to furnish their homes or upgrade their phones during the homebound months of the pandemic. Now, they are shifting their purchases to restaurants, lodging and travel, as vaccination rates rise and people feel safer venturing out.
“The decline was a bit of a shock,” said Beth Ann Bovino, U.S. chief economist at S&P Global. “But there are reasons I am not worried.”
For one, buying has climbed to record levels over the past several months and well above what consumers were spending before the pandemic, Bovino said. Another factor weighing on spending last month was limited supply, particularly of automobiles. Auto sales fell 4% in May.
Vehicle production has been slowed by a lack of semiconductors, part of a global supply chain issue that is affecting a variety of products like Starbucks coffee flavorings and lumber. But government data this week also showed that auto production picked up in May as supply chain issues eased, which should lead to more sales this summer.
Tuesday’s retail sales report also does not capture spending on travel and hotels, although credit and debit card data shows that those sectors rebounded significantly in May. Consumers spent 16% more on lodging during the Memorial Day weekend than they did during the holiday in 2019, according to an analysis by Bank of America.
Economists say consumers are undergoing a “rotation” of their unusual pandemic spending patterns. It began in the lockdown months of the pandemic with huge jumps in grocery purchases and plummeting restaurant revenue. As the time at home dragged on, many people took on renovation projects, upgraded their furniture and entertained themselves with new electronics and sporting goods.
Last month showed another shift. Spending on furniture declined 2.1%, while electronics and appliance purchasing fell 3.4%. Purchases at restaurants and bars rose 1.8%. Consumers spent more on clothing and accessories last month, partly reflecting the need to dress up to go back into gradually reopening offices after months of remote work. Department store sales rose 1.6%.
With so many caveats in the retail sales report, Ian Shepherdson, chief economist at the Pantheon Macroeconomics, said the data was not that helpful in assessing the true health of consumers.
“The headline declines in today’s numbers tell us nothing about the future,” Shepherdson wrote in a research note.
Still, a lot is riding on the American consumer, who has been the driver of the nation’s broader economic recovery. Any deviation from the policymakers’ hopes that retail sales will continue to increase steadily now that the country is opening back up and more people are vaccinated is surprising to economists. The federal government has spent more than $1 trillion during the pandemic trying to ensure that Americans keep spending and to prevent stores and restaurants from closing during the lockdowns.
The stimulus payments, by many measures, have paid off. Spending last month was about 18% higher than pre-pandemic levels. Economists are now watching whether the end of the stimulus money — the last checks were sent out in mid-March — will lead to decreased spending.
The Federal Reserve will release its June policy statement and economic projections on Wednesday, followed by a news conference with Jerome Powell, the central bank’s chair. He is likely to give an updated assessment of inflation, the labor market and the overall economic recovery after a string of surprising data points like last month’s retail sales.
The meeting and remarks will be closely watched by investors, who are looking for any hint that the Fed is preparing to slow its $120 billion in monthly government-backed bond purchases — a policy meant to stoke the economy by keeping many kinds of borrowing cheap.
Bovino of S&P Global says one of the biggest tests for the recovery will come this fall, when the additional unemployment benefits expire and schools reopen, setting the stage for parents to return to work. That is when it will become clearer whether stimulus-fueled retail spending translated into sustainable job growth and business creation.
Another risk is that these early signs of inflation, caused largely by supply issues, will become more acute and prompt consumers to pull back.
But most economists are optimistic that spending will stay on an upward trajectory. Gus Faucher, chief economist at PNC Financial Services Group, predicted Tuesday that retail sales would grow at a “moderate pace” in the near future because many American consumers, on balance, were in a good financial condition.
“The positives — lots of household savings, normalizing supply chains, rising wealth due to higher stock prices and home values, an improving labor market, and low interest rates — outweigh the negatives of higher prices and pent-up demand,” he said.