Do Soft Retail Sales Indicate US Consumers Are Reaching Their Limits?

Key Takeaways:

  • Retail sales in April were stagnant, falling short of expectations.
  • Economists are concerned that consumers may be reducing their spending due to high interest rates, depleted savings, and mounting debt.
  • Consumer spending has been a driving force behind the economy’s recent growth, but the latest data has economists questioning whether consumers are reaching their limits.

The latest data from the Census Bureau reveals that retail sales in April remained virtually unchanged from the previous month, coming in at $705.2 billion. This figure fell short of the 0.4% increase that economists had anticipated.

Economists, such as Michael Pearce from Oxford Economics, believe that consumer spending is slowing down due to factors such as high interest rates and a cooling labor market. These factors are weighing on rate-sensitive spending and dampening consumer confidence.

In the first quarter, consumer spending remained strong despite interest rates being at their highest levels in decades. This strong spending helped to avert the long-predicted recession. However, the slowdown in retail sales in April has some economists questioning whether consumers are beginning to tire.

While the stagnant retail sales in April may not necessarily indicate that consumers have exhausted their spending power, it does suggest that the unstoppable consumer growth seen in recent months may be slowing down. Economists at Wells Fargo, Tim Quinlan and Shannon Seery Grein, note that this shift in retail sales is a departure from the trend, but it does not necessarily mean that consumers have completely stopped spending.

Overall, the combination of depleted savings, high debt levels, and slowing job growth has economists concerned about the sustainability of consumer spending and its impact on the broader economy. The coming months will provide further insight into whether this slowdown is temporary or indicative of a larger trend.
The retail sales report showed a slowdown for online retailers, which economists attribute in part to an Amazon sales event in March. The timing of Easter this year could also impact year-over-year comparisons.

However, economists also noted that the data suggests consumers are becoming less inclined to spend.

According to BMO Senior Economist Jay Hawkins, “Depleted excess savings, record household debt, and a significant slowdown in job growth caused consumers to reduce their spending last month.”

Morning Consult Retail & E-Commerce Analyst Claire Tassin pointed out that the gains in sales over the past year may be primarily due to inflation rather than increased sales. She explained that the retail sales report is not adjusted for inflation and noted that the 2.7% increase in sales from last April was below the 3.4% consumer price inflation rate over the same period. This suggests that the sales gains are solely due to inflation, not increased consumer demand.

The impact of slowing retail sales on the broader economy may seem negative, but it could also indicate a reduction in inflationary pressure. This would be good news for consumers and might prompt the Federal Reserve to consider cutting its benchmark interest rate.

The Fed has been raising its influential fed funds rate to combat inflation. High interest rates are designed to curb consumer spending by making borrowing more expensive.
Inflation experienced a decline in 2023, but progress has been stagnant so far this year due to ongoing price increases. Officials have expressed the need for more data indicating that interest rates are having the desired impact before considering a reduction in rates.

According to Nationwide Financial Markets Economist Oren Klachkin, today’s data is likely to be viewed by Fed officials as a partial offset to the persistently high inflation environment.

Another release on Wednesday revealed that inflation in April increased at a slower pace compared to the previous month. The consumer price index for April rose by 3.4% annually, down from 3.5% in March, but still well above the Fed’s long-term annual target of 2%.