The American consumer is the main driver of our economy. In fact, consumer spending accounts for two-thirds of our nation’s economic growth.
A key indicator of that spending is the Retail Sales report, released each month by the U.S. Department of Commerce. Retail sales consist of receipts from stores and merchants incorporating all in-store, internet and catalogue sales. It is a broad-based measure that tracks sales across 13 retail industry sectors.
In 2016, monthly retail sales increased, on average, by a modest 2.7% over the previous year. But in 2017 and 2018, retail sales surged. A strong economy, labor market and rising wages — fueled by high consumer optimism — sent shoppers into a buying frenzy. Annual sales growth skyrocketed to 4.6% in 2017 and 4.8% in 2018.
But in late 2018, the American consumer fell into hibernation. In what was expected to be a very strong retail holiday shopping season, sales in November and December plummeted, which continued through January and February. This four-month stretch of disappointing sales triggered alarm bells for the U.S. retail industry.
Since then, the retail industry has shown signs of recovery. The latest Retail Sales report, released on Tuesday, reported sales in June increased by 0.4% from May — the fourth consecutive month of increasing sales. The markets had expected a gain of just 0.1%. Over the past 12 months, sales grew by an impressive 3.4%.
In June, 11 of 13 retail sectors reported an increase in sales over the prior month. The top-performing sector was Nonstore Retailers — primarily internet retailers — which reported a 1.7% monthly gain. Rounding out the Top 3 were Food Services & Dining Places (0.9%) and Motor Vehicle & Parts Dealers (0.7%). The two retail sectors that reported declining sales growth were Gasoline Stations (-2.8%) and Electronics & Appliance Stores (-0.3%).
Despite a slow start, so far this year, retail sales have averaged a 3.1% annual growth rate. Yes, this is a sizable pullback from the 2017 and 2018 growth rates of 4.6% and 4.8%, respectively. However, it is significantly higher than the anemic 2.7% pace of growth in 2016. And that sums up the current state of the retail industry — good, but far from great.
So, where does the retail industry go from here? Much of that answer falls at the doorstep of the U.S. Federal Reserve. To offset the strains of global economic weakness and the U.S.-China trade dispute, the Fed is expected to begin lowering interest rates. As the Fed lowers interest rates, it lowers the cost of borrowing on debt. Ultimately, this stimulates consumer spending and helps boost economic growth.
The Fed’s first rate cut is expected at its next meeting on July 31. After that, the uncertainty begins. The Fed will meet three more times this year — in September, October and December — and the markets will be anticipating even more interest rate cuts. The Fed, however, hasn’t committed to further lowering interest rates. And that’s the great unknown — will the Fed live up to the market’s expectations for additional rate cuts to further boost consumer spending? The markets and America’s retailers are counting on it.