Macro

US Consumer Spending Resilient Amid Retail Dip, Eyes on Services

April's retail sales dip raises concerns, yet evidence suggests US consumer resilience, with a shift from goods to services spending.

By Athena Xu

5/16, 09:09 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF
Amazon.com, Inc.
JP Morgan Chase & Co.
Walmart Inc.
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Key Takeaway

  • Despite recent poor retail numbers, broader consumer spending remains resilient, especially in services with a 7% run-rate.
  • Market reactions and economic data have been generally negative, but the US consumer's spending strength shouldn't be underestimated.
  • A cautious stance is advised until more evidence of a downturn in broader consumption and service spending emerges.

Retail Sales Dip Sparks Concern

April's retail sales report indicated a broad-based weakness across discretionary categories, suggesting a potential pullback by consumers. Notably, gasoline stations saw the most significant gains, while sectors such as general merchandise, health and personal care stores, and non-store retailers, which include online platforms like Amazon, experienced declines. The latter category marked its most substantial monthly decrease since March 2023. This downturn in retail sales has raised eyebrows, especially given the recent rally in stocks following a better-than-expected Consumer Price Index (CPI) print. However, the underlying consumer weakness could pose a growing risk moving forward.

Consumer Resilience in Question

Despite the retail sales slump, it's premature to declare the US consumer defeated. Historical wisdom in finance suggests betting against the US consumer is often a mistake, a sentiment echoed by JPMorgan's chief economist, Bruce Kasman, who famously said, "If you give them income, they will spend." This principle has largely held true, barring the years following the Global Financial Crisis (GFC). The recent retail figures have indeed sparked speculation about consumer exhaustion, supported by anecdotal evidence from sources like the Beige Book. However, retail sales provide an incomplete picture of total spending, capturing primarily goods while excluding many services. With inflation pushing service costs higher, a more comprehensive view of personal spending reveals a different, more resilient picture.

Analyzing Broader Consumption Trends

The focus on retail sales alone overlooks the broader consumption trends, particularly in services, which have remained robust. The discrepancy between retail and overall personal spending data since the end of 2021 highlights this resilience, with the latter consistently outperforming economists' expectations. This suggests that the US consumer may be shifting spending from goods to services rather than pulling back altogether. However, the recent economic data has generally underperformed, raising concerns about the broader economic outlook. The Bloomberg and Citigroup economic surprise indexes reflect this trend, indicating that most recent data has fallen short of expectations.

Market Reactions and Future Outlook

The market has adjusted its expectations in light of recent developments, with option-implied odds of a rate hike returning to more sensible levels. The shift towards pricing in a greater chance of multiple rate cuts rather than just one reflects a growing anticipation of an economic slowdown. Yet, before concluding on the US consumer's fate, more evidence is needed. The upcoming earnings report from Walmart, among others, will provide further insights into American households' health. Given the current economic indicators and market reactions, a cautious yet open-minded approach is warranted.