Retail Sales: Resilience or madness?

Summary

Somehow rising delinquencies, higher consumer financing costs and the erosion of pandemic-era savings comprised the perfect formula for an expectation-crushing 0.7% increase in July retail sales...and for an added flex, the gain comes despite upward revisions to prior monthly data.

Upside potential for Q3 PCE – If the resilience can be sustained

Retail sales rose 0.7% in July after modest upward revisions to June. To say the July data surprised to the upside is an understatement when you consider that the 1.0% gain in the control group measure, which feeds directly into the BEA's calculation of goods spending in its GDP accounting, beat all 28 forecast expectations tallied by Bloomberg. In short, these data present upside risk to our call for real personal consumption expenditures to expand at a 1.8% annualized rate in Q3, and thus GDP (chart).

Strength was fairly broad-based across retailers, with nine of 13 retailers reporting increased sales in July (chart). Overall sales were somewhat buoyed by ecommerce amid the Prime Day event that occurred during the month, though the 1.9% monthly gain in non-store sales was likely somewhat muted by seasonals. Still, we would not be shocked to see some payback in August, particularly as July marked the fourth consecutive +1% monthly gain in non-store sales.

Other sources of strength came from sporting goods (1.5%), clothing (+1.1%), grocery stores (+0.8%), general merchandise (+0.8%) and building materials (+0.7%), all of which bounced back after weakness in June. The 1.4% gain in restaurant sales is our first look at services consumption for July and suggests demand remained elevated.

Housing-related categories were relatively weak with furniture and electronic stores reporting the largest declines, down 1.8% and 1.3% during the month respectively. There is some near-term downside risk for these categories as they tend to lag existing home sales, which remain under pressure

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