Introduction

What’s the Story? In our Leading Indicators of US Retail Sales monthly series, we examine several key macroeconomic indicators and analyze how they may impact retail sales in the coming months. We analyze the latest available data as of July 20, 2022, from various sources, including the US Census Bureau, the US Bureau of Economic Analysts (BEA), the US Bureau of Labor Statistics (BLS), the US Department of Housing and Urban Development (HUD) and the Federal Reserve Bank of St. Louis. Why It Matters Macroeconomic indicators have a significant impact on overall retail sales growth. Looking at 10 indicators (unemployment rate, labor force participation rate, disposable income per capita, average hourly wages, consumer sentiment, saving rates, gas prices, federal funds rate, housing starts and housing prices), we can historically account for much of the variation in retail sales growth and create a strong basis for predicting sales moving forward. The close correlation between retail sales growth predictions based on economic indicators and actual retail sales growth is shown in Figure 1.

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Figure 1. US Actual Retail Sales (ex. Auto and Gas Sales) vs. Model Predicted Sales (YoY % Change) [caption id="attachment_152277" align="aligncenter" width="700"] Through June 2022
Source: BEA/BLS/Federal Reserve Board of Governors/S&P/Coresight Research[/caption]   During the first half of 2022, retail sales growth performed strongly against the backdrop of record-high consumer price increases. In June, retail sales growth was in line with the previous few months of growth; however, in mid-single digits, retail sales growth is not keeping pace with consumer price increases. In June, consumer price increases accelerated to a 41-year high, growing 9.1% year over year. In an attempt to get inflation under control, the Federal Reserve Bank has started raising rates to deliberately slow the economy's long-term growth. The June interest rate hike has already cut into the wealth effect consumers felt throughout the pandemic and is likely to continue to do so. Hence, we have a more modest outlook for retail sales growth as we head into the second half of 2022.

Leading Indicators of US Retail Sales: Coresight Research Analysis

Indicators Overview Five of the 10 indicators we examined are likely to positively impact retail sales in the coming months. In June, the unemployment rate remained near a half-century low. Average hourly wage growth remains historically high at around 5%, although it is not keeping pace with inflation. As of early July, consumer sentiment has marginally improved from a record-low June reading due to gas prices climbing down. Gas prices moving downwards may also signal that June’s Consumer Price Index (CPI) increase could have been the peak of consumer price increases, meaning we may now be on the path to getting inflation under control.

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Figure 2. US: Leading Indicators of Retail Sales as of July 20, 2022 [caption id="attachment_152278" align="aligncenter" width="700"] Latest available data from June unless otherwise indicated
*Not included in predictive model
Source: BEA/BLS/Federal Reserve Board of Governors/S&P/University of Michigan/US Energy Information Administration/Coresight Research[/caption]   Our model, which analyzes correlations between retail sales and macroeconomic indicators, predicts retail sales growth to remain in the mid-single digits for the remaining two months of summer, with sales growing 5.3% from a year earlier. This continued modest sales growth is in-line with what we expected to see upon entering the peak summer months. As mentioned in our previous report, summer 2022 is a “summer of experiences” as consumers unleash their pent-up demand to travel, redirecting spending away from goods and towards services and experiences. Other headwinds to sales growth include the rising prices of essentials, such as gas and energy, and increasing interest rates.

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Figure 3. US Retail Sales ex. Auto and Gas (YoY % Change) [caption id="attachment_152280" align="aligncenter" width="700"] Source: US Census Bureau/Coresight Research[/caption]   The Job Market In June, the US added 372,000 jobs to nonfarm payrolls, far better than the 250,000 initially estimated by the Dow Jones. Job growth was led by the health care, leisure and hospitality, and professional and business services sectors. The transportation and warehousing sector added 36,000 jobs, with notable gains in storage (18,000) and air transportation (8,000), according to the BLS. Meanwhile, retail only saw marginal job growth in June, adding just 15,400 jobs. The unemployment rate remained unchanged for the third consecutive month. At 3.6%, current unemployment sits below the rate needed for the economy to be at “full-employment” (5%). Meanwhile, the labor force participation rate ticked down—at 62.2%, the unemployment rate is 1.2 PPTs below its pre-pandemic value, indicating that the economy has yet to recover from the pandemic-led loss of labor. The demand for labor remains high—in May, there were 11.3 million job openings and only 6.5 million hires, according to the latest available data from the Job Openings and Labor Turnover survey. Furthermore, the “Great Resignation” remains in effect: 4.3 million people quit their jobs in May, a near-record high.

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Figure 4. US Unemployment Rate (Left Axis, %) and Labor Force Participation Rate (Right Axis, %) [caption id="attachment_152281" align="aligncenter" width="700"] Source: BLS[/caption]   Average hourly wage growth continues to move upwards within the tight labor market. Average hourly wages increased by $0.10 month over month, representing 5.1% year-over-year growth. The increase may be small in dollar terms but is significant when considering the size of the US workforce. Still, the 5.1% growth in average hourly wages under paces the 9.1% growth in consumer prices in June, implying a real-term erosion of wages.

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Figure 5. US Average Hourly Wages, All Private-Sector Employees (USD) [caption id="attachment_152282" align="aligncenter" width="700"] Source: BLS[/caption]   Implications The month of June brought a better-than-expected jobs report, reflecting the continued strength of the labor market despite fears of an oncoming recession. For the moment, workers remain in high demand as businesses struggle to fill vacancies. However, this could change soon, after the summer months. Layoffs remain few and far between, but companies are now considering the benefits of hiring extra workers versus the costs of doing so amid current economic uncertainty. Recession fears have also led the Federal Reserve Bank to hike interest rates high enough to deliberately slow the longer-term growth of the US economy. Year-to-date, stock markets have not performed well and have responded poorly to the climbing interest rates. If the US is to head into a recession, the declining market performance could pull some early retirees back into the labor force, especially if their income is reliant on their IRA portfolio’s performance. Income, Savings and Sentiment In May (latest available data), real disposable income per capita was mostly unchanged, increasing by just $1.00. The general downward movement in disposable income per capita since March 2021—when the third round of stimulus boosted disposable income—reflects a positive sign for consumer spending in the short term: consumer spending is persisting through the 40-year-high inflationary context, driven by pandemic-led savings.

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Figure 6. US Annualized Real Disposable Income Per Capita (USD) [caption id="attachment_152283" align="aligncenter" width="700"] Source: BEA[/caption]   The personal savings rate showed some improvement in May (latest available data), growing to 5.4%, while the BLS revised April’s estimate up from 4.4% to 5.2%. The personal savings rate is now 2.9 PPTs below its February 2020, pre-pandemic level, reflecting the effects of a 41-year high in consumer price increases. While consumers continue to spend strongly through inflation, they are spending much of what comes in each month.

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Figure 7. Personal Saving Rate (%) [caption id="attachment_152284" align="aligncenter" width="700"] Source: BEA[/caption]   The preliminary July estimate of consumer sentiment showed some marginal improvement from June’s record-low reading, with the consumer sentiment index sitting at 51.1, up from June’s final reading of 50.0. However, the early-July reading marks a 37.1 percent decrease from a year ago. The depressed consumer sentiment is a consequence of rapid inflation and an uncertain longer-term economic outlook.

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Figure 8. University of Michigan Consumer Sentiment Index [caption id="attachment_152286" align="aligncenter" width="700"] Source: University of Michigan[/caption]   More positively for the economy, gas prices have started to ease. The average price per gallon of gas in the US has been falling since the week of June 13, when prices eclipsed the $5.00 mark for the first time in history. As of the week of July 11, the average price per gallon of gas in the US stands at $4.65.

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Figure 9. US Regular All Formulations Gas Price (Dollars per Gallon) [caption id="attachment_152287" align="aligncenter" width="700"] Source: US Energy Information Administration[/caption]   Implications Higher gasoline prices have a multiplier effect, impacting the cost of goods delivery and personal travel. The easing of gas prices reflects that we have moved beyond the peak of summer travel—a reduced number of consumers traveling is easing demand for gas and therefore relieving the upward pressure on gas prices. Since gas prices are the largest contributor to overall inflation, easing gas prices may indicate that consumer price increases peaked in June, and we may now be on the path to getting inflation back under control. See Coresight Research’s US Consumer Tracker for more details on the effects of summer travel. Housing Housing starts marginally improved in June but remained mostly in line with May. Compared to a year ago, housing starts are 6.3% lower. The recent drop-off in housing starts is a consequence of rising mortgage rates in response to the Federal Reserve’s interest rate hikes. As of July 14, the average 30-year fixed mortgage rate stood at 5.51%, the highest rate since November 2008. Rapidly rising mortgage and interest rates pose as headwinds to the housing market, negatively affecting both housing starts and the sales of new homes. In May (latest available data), sales of new homes declined by 5.9% from the year prior. Home prices continued to climb in April (the latest month for which Case-Shiller Index data is available), reaching 301.0 points, up from 296.3 points in March. Rising home prices can create a wealth effect, making consumers feel more affluent, emboldening them to spend. However, we believe housing prices will likely fall in the coming months in response to decreasing demand for new homes.

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Figure 10. Housing Starts (Thousands, Left Axis) and Case-Shiller US Home Price Index (Right Axis) [caption id="attachment_152288" align="aligncenter" width="700"] Source: HUD/US Census Bureau[/caption]   While the recent rise in housing prices can cause some consumers to feel more affluent, it also means many are forced to rent rather than buy—contributing to rising rental costs. In June, consumer prices for rent of primary residences increased 5.8% from a year earlier, according to the BLS, the fastest pace since September 1986. Implications The strength of the housing market, especially house prices, had largely been a benefit for retail. House moves contribute to furniture, furnishings, home-improvement and appliance sales and can trickle down further to discretionary sectors such as electronics. With new home purchases declining sharply year over year, sales growth has slowed in these related sectors. Furniture and home-furnishing retailers’ sales grew by 4.8%, largely underpacing the 10.2% increase in furniture and home-furnishing prices in June, while sales at electronics and appliance stores declined 8.7%.

What We Think

We expect retail sales growth to remain in the mid-single-digit territory through the summer and back-to-school season. As consumers battle inflationary pressures and interest rate hikes, we expect them to spend more on experiences while pulling back on goods spending. Implications for Brands/Retailers

• The continuation of interest rate hikes, now steeper than initially planned by the Federal Reserve, is likely to reduce demand for goods in the long term. We believe consumers will spend strongly in the short term, until the back-to-school season.
• As we move into the back half of 2022, we should expect more modest sales growth. As consumers return home from their summer vacations and settle into the new school year, they will have to face the reality of historically low savings and, therefore, a pullback on spending.
• The Federal Reserve’s interest rate hikes will dampen the wealth effect consumers felt through the pandemic, potentially resulting in a slight pullback in overall consumer spending after the summer season.