US Retail Sales Drop Unexpectedly in May as Soaring Inflation Squeezes Buying Power

People shop at a grocery store in New York City on May 31, 2022. (Samira Bouaou/The Epoch Times)

Retail sales in the United States fell in May, delivering a downside surprise as analysts generally predicted solid spending by American consumers, whose willingness to keep shopping is key to averting what a growing number of economists warn is a looming recession.

The Commerce Department said on June 15 that U.S. retail sales fell 0.3 percent last month, down from April’s revised 0.7 percent growth and below consensus forecasts for a 0.2 percent advance.

The retail sales dip was driven mostly by a 3.5 percent decline in auto purchases, with significant contributions from declines in electronics (minus 1.3 percent) and furniture (minus 0.9 percent).

May’s drop in retail sales is the first so far this year and comes as the Federal Reserve has embarked on an aggressive tightening cycle in a bid to cool runaway inflation. The coming rate hikes are likely to further challenge the American consumer, whose purchasing power has been eroded by soaring prices.

While Americans saw their nominal wages grow 0.3 percent in May, the much higher 1.0 percent pace of inflation that same month means that real earnings fell 0.6 percent, giving many people an effective pay cut.

Analysts at ING predicted in a note that the second half of the year will be more challenging for consumer spending, which has thus far been buoyed by a willingness of Americans to dip into their savings or use credit cards to keep shopping.

“Rising borrowing costs, falling equity markets (and household wealth) and concerns about the outlook for the housing market all risk dampening spending,” the analysts wrote. “At the same time there is evidence that the rate of wage inflation is slowing, which will mean ongoing erosion of spending power.”

“For spending to continue growing strongly we will need to see households run down their savings or accumulate debt at an even faster rate, which we increasingly doubt will happen,” they added.

Consumer spending is a key driver of the U.S. economy, accounting for around two-thirds of GDP.

Christophe Barraud, chief economist and strategist at Market Securities, predicted that the disappointing retail sales numbers would lead to another downgrade of second-quarter GDP estimates.

The U.S. economy contracted by 1.5 percent in the first quarter. With a recession generally defined as two successive quarters of falling GDP, a second-quarter contraction would make an economic decline official.

Some analysts reacted to Wednesday’s disappointing retail sales data by saying that it points not to a looming recession but one that’s already here.

Economist Peter Schiff said in a tweet that it’s “more evidence that #inflation has already caused a #recession.”

Money manager David Brady said in a tweet that, besides missing expectations, the retail sales figures are particularly disappointing as they aren’t adjusted for inflation and so the data reflects an even sharper spending pullback.

“Retail sales are not adjusted for inflation. So if prices rise 5%, even if the same amount of goods are sold, sales should be up 5%. However, besides missing expectations, they were down -0.3% vs +0.7% in Apr, even with the CPI +0.7% in May,” he wrote, adding, “Recession is already here.”

The latest Atlanta Federal Reserve Bank GDPNow forecast from June 8 estimates that the United States’ gross domestic product will grow by 0.9 percent in the second quarter.

Other analysts pointed to hopeful signs in the retail sales data, such as solid spending on food services and drinking places, which advanced 0.7 percent in May.

“Bar and restaurant sales were up 17.5 percent year-over-year and were the third-biggest month-over-month gainer, which suggests consumer strength and pent-up demand,” Ted Rossman, Senior Industry Analyst at Bankrate, told The Epoch Times in an emailed statement.

“If people were really worried about inflation, you would think that dining out would be a discretionary expense that would be easy to cut back on, so I see this as a positive data point for consumer confidence,” he added.

Soaring inflation has had a chilling effect on consumers, with the Michigan Consumer Sentiment index tumbling to 50.2 in June, the lowest level on record.