Does the Jump in Retail Sales Mean the Economy Is OK?

Retail sales rose 1% in June after a 0.1% decline in May. Mainstream media breathlessly reported that the jump in retail spending “eases” recession fears.

Does it though?

The short answer is not necessarily.

As CNBC reported, “rising costs for food and gasoline, in particular, helped propel the increase.”

Excluding autos, the monthly rise was still 1%, topping the 0.7% estimate. A big drop in auto sales in May was a big factor in driving May’s retail sales decline.

Breaking down the data, sales at bars and restaurants increased 1% – reflecting rising food prices. Online sales rose 2.2%, and furniture and home store sales were up 1.4%. But sales of general merchandise dropped 0.2% driven by a 2.6% plunge in department store sales.

The mainstream narrative is that Americans are spending more “despite” rising prices. In fact, Americans are spending more because of rising prices.

In reality, Americans aren’t buying more stuff. They’re simply paying more for the things they’re buying. The June CPI came in at 9.2% annual, and retail sales are not inflation-adjusted. On a month-to-month basis, CPI rose a blistering 1.3%. That means the entirety of the rise in retail sales can be accounted for by rising prices — and then some.

When you look deeper at the data, it’s pretty clear Americans aren’t spending more because they’re confident about the economy. They’re spending more because they have to. This is an involuntary spending spree. American consumers are spending hand-over-fist in an effort to keep up with surging prices.

Since retail sales are expressed in dollar amounts, they reflect both units sold and rising prices. That means there are two ways retail sales can go up.

1. Consumers buy a larger quantity of stuff.
2. The price of the stuff they’re buying goes up.

In other words, just because dollar widget sales increase doesn’t mean people bought more widgets. It could be that they bought fewer widgets but paid more for them.

This is exactly what’s happening in many retail sales segments.

After telling us we don’t have to worry about a recession anymore (despite the fact that the Atlanta Fed projects a second quarter of economic contraction — literally a recession) the AP admitted that the jump in retail sales was primarily driven by higher prices. But the intrepid reporters at the Associated Press assured us that the American consumer is “still providing crucial support for the economy.”

And how exactly are they doing that?

They certainly aren’t earning more money. According to the latest data, real average hourly earnings fell 1% for the month of June and were down 3.6% year on year.

So, you can MasterCard, Visa, Discover and American Express for the spending spree.

Consumers are running up credit card debt at a staggering rate. We don’t have June’s consumer data yet, but we know that despite the drop in retail sales in May Americans added another $22.35 billion to a debt load that was already at record levels.

Revolving credit, primarily reflecting credit card debt, rose by $7.42 billion in May. That was an 8.1% increase. To put that into perspective, the annual increase in 2019, prior to the pandemic was 3.6%. It’s pretty clear that with stimulus money long gone, Americans have turned to plastic in order to make ends meet as prices continue to skyrocket.

My guess is that the June consumer credit data will reveal an even bigger jump in credit card debt reflecting the increase in retail sales.

Consumer confidence is in the gutter, but it appears a lot of people have taken on an “eat, drink and be merry for tomorrow we die” attitude. They’re still spending. But they’re borrowing to do it. And tomorrow is fast-approaching. And with it depleted savings, looming credit card limits, and a continuation of rising prices.

This is simply not a sustainable trajectory, no matter how the mainstream press tries to spin it. The question is how much longer can over-indebted consumers keep paying these upward-spiraling prices? Especially given the fact that the Fed is now raising borrowing costs?