The upside surprises in retail sales that were announced on Tuesday proved that the significant slowdown in inflation in the past two months has been a major tailwind for consumer spending, not the other way around as many had anticipated.

After adjusting for inflation, sales volume for June, which has not been released yet, should grow much more than what the top line figure suggested. We estimate that sales volume grew by 0.3% to 0.4%, a strong showing of consumer strength in June after the recent pullback.

The most important leading indicator for gross domestic product in the second quarter is sales of the control group, which excludes volatile components like autos, gasoline, food and building materials. That figure showed an even stronger number, rising by 0.8%.

Together with the upward revision to May’s data, the probability that gross domestic product, especially the consumption component, will grow above 2% in the second quarter should increase markedly. Our forecast before the release of the data o Tuesday was at 1.8%.

Underneath the top-line figure, sales of gasoline and motor vehicles led the drop, falling by 3% and 2%, respectively. They are often two of the most important components of the overall sales number.

Such big drops helped consumers have enough money to spend elsewhere, mostly on online sales, with the non-store component rising by 1.9% in June.

Food service, the only service component, grew by 0.27%, likely because of price increases. Similarly, sales from food stores increased by 0.1%. Sales at department stores grew by 0.4%, a solid rebound after two months of disappointing results.

Looking ahead, we expect American consumers to remain resilient in July with easing inflation continuing to be a tailwind and the sales boost from the two Amazon Prime days.

While the economy is cooling down, we believe that the concerns over the so-called death of the American consumer have been exaggerated.

It is true that excess savings might have run out by now. But American households still have strong balance sheets, which have been replenished by strong income growth from wages and assets from the equity markets.

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This article was written by Tuan Nguyen and originally appeared on 2024-07-16. Reprinted with permission from RSM US LLP.
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