- Retail sales drop 1.3% in May…
- Producer prices post largest annual gain on record…
- Fed begins policy meeting amid surging inflation data…
New data shows the economic recovery in the U.S. is slowing down as rising prices weigh on consumers.
The U.S. Census Bureau released new data today showing retail sales fell 1.3% in May but were up 28.1% compared to a year ago when the economy was basically shut down.
That was a steeper drop than economists’ expectations for a 0.6% decrease in retail sales as the stimulus-induced boom in the economy fades.
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A closer look at the retail sales data shows a shift in where consumers are spending their money.
Overall spending is moving back into the services sector and away from goods as the U.S. gets closer to fully reopening.
Excluding auto sales, retail sales dropped 0.7% last month while sales excluding gas stations were down 1.5%.
That sharply missed expectations for sales to rise 0.5% excluding autos, while auto sales dropped 3.7% in May
Sales of building materials and garden supplies tumbled 5.9% last month, with miscellaneous store sales dropping 5%, and general merchandise sales down 3.3%.
But sales of clothing and accessories rose 2% and surged more than 200% year-over-year.
Sales at bars and restaurants were up 1.8% for the month and more than 70% compared to May 2020.
April’s retail sales were revised higher to show a 0.9% increase instead of being unchanged as previously reported.
Despite the sales miss in May, leaders in the industry are still expecting a strong rebound in consumer activity this year.
The National Retail Federation recently revised its annual forecast for 2021, projecting retail sales will grow “between 10.5% and 13.5% to more than $4.44 trillion this year.”
NRF President and CEO Matthew Shay said, “The economy and consumer spending have proven to be much more resilient than initially forecasted. The combination of vaccine distribution, fiscal stimulus and private-sector ingenuity have put millions of Americans back to work. While there are downside risks related to worker shortages, an overheating economy, tax increases and over-regulation, overall households are healthier, and consumers are demonstrating their ability and willingness to spend.”
The NRF also hiked its forecast for GDP growth in 2021, now expecting “full-year GDP growth to approach 7%, compared with the 4.4% and 5% forecasted earlier this year.”
May’s drop in sales comes despite Americans having record high savings ready to spend as life returns to normal.
The Federal Reserve’s Financial Accounts of the United States report from last week showed balances of cash, checking accounts, and savings deposits hit a record-high $14.5 trillion in the first quarter.
But the biggest challenge consumers are facing continues to be inflation and data released today shows that problem getting worse.
Producer Prices Surge
The Department of Labor released its producer price index (PPI) for May today, which showed prices rising 0.8% from April and surging 6.6% compared to May 2020.
That was the fifth straight month of increasing PPI while the year-over-year change was the highest ever recorded since that data started being tracked in August 2010.
The so-called core PPI, which excludes food and energy, rose 0.7% monthly and 5.3% annually in May.
There were substantial price increases across several categories of goods last month.
Prices for grains surged 25.7%, oilseeds prices jumpy 19.5%, and beef and veal prices were up 10.5%.
The Labor Department said “Over 40 percent of the May increase in the index for final demand services is
attributable to margins for automobile retailing (partial), which jumped 27.3 percent.”
A new poll by Trafalgar Group and Convention of States Action shows a plurality of Americans think President Biden is responsible for the rising inflation.
Overall, 39.0% of respondents to that survey said they hold Biden most responsible for rising inflation, while 17.7% said former President Trump, 14.4% blamed the current Congress, 10.9% blamed the immediate previous Congress, and 17.9% said they didn’t know.
But the poll showed a sharp divide along party lines.
Among Democrats, 27.3% said Trump is responsible for the current inflation while 21.5% blamed Biden.
Among Republicans, 64.3% said Biden is responsible and just 6.0% put the blame on Trump.
Among respondents who do not identify with any political party, 35.5% blamed Biden, 17.5% blamed the current Congress, and 16.9% blamed Trump.
The inflation data comes as the Federal Reserve kicks off a two-day policy meeting today, with officials continuing to insist the price increases are “transitory.”
Reaction on Wall Street
Markets opened flat following the release of the retail sales and PPI data this morning before quickly turning negative as all eyes turn to the Central Bank.
Analysts are not expecting any big policy changes from the bank this week but a shift in messaging could be on the horizon.
In recent weeks, several Fed officials started laying the groundwork for Wall Street to prepare for talks about tapering asset purchases.
And even as Central Bankers insist inflation is transitory, big market players are pushing back on that stance.
Jamie Dimon, CEO of JPMorgan Chase, said Monday that his bank has been “effectively stockpiling” cash amid the current inflationary environment.
Dimon said, “We have a lot of cash and capability and we’re going to be very patient, because I think you have a very good chance inflation will be more than transitory.”
He said the bank’s cash reserves will allow them to benefit from higher interest rates and buy higher-yielding assets in the future.
“If you look at our balance sheet, we have $500 billion in cash, we’ve actually been effectively stockpiling more and more cash waiting for opportunities to invest at higher rates,” Dimon said. “I do expect to see higher rates and more inflation, and we’re prepared for that.”
And he’s not the only big bank CEO sounding the alarm on inflation.
Morgan Stanley CEO James Gorman echoed Dimon’s comments during a Monday interview on CNBC.
Gorman said, “The question is when does the Fed move? It has to move at some point, and I think the bias is more likely earlier than what the current dots suggest, rather than later.”
Analysts expect the Central Bank may pencil in a 2023 rate hike in its forecast this week after previously outlining no rate hikes through the end of 2023.
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