U.S. Consumer Spending: Hot or Not?

Consumer spending, which is best measured by retail sales, makes up about two-thirds of the U.S. GDP. Recently, market watchers have been eyeing growth indicators such as this closely because they want to see if the economy is strong enough to stay on its feet with less stimulus from the central bank.

As I’ve mentioned in my U.S. retail sales trading guide, it has become increasingly important to track this particular component of GDP because the U.S. economy has become more and more dependent on it for growth. With the government cutting costs, the private sector and households have had to step up their own spending to pick up the slack.

Lately, the consumer sector has been doing a good job of being one of the primary drivers of economic activity, with employment and consumer confidence showing consistent improvements over the past few months.

However, the June retail sales release turned out to be a huge disappointment.

According to the latest stats, American consumers kept most of their hard-earned cash in their pockets last month and refrained from spending, which suggests that the economy ended the second quarter on a low note.

The headline retail sales figure indicated a growth of 0.4%, which is well short of the 0.7% consensus forecast. Meanwhile, the core retail sales figure stayed flat and showed no growth at all, contrary to the 0.5% increase that many had expected. As if that wasn’t bad enough, the May headline retail sales figure was revised down from 0.6% to 0.5%!

Let’s take a closer look at the components of the report to get a clearer idea of what U.S. consumers are up to these days.

Apparently, average Joes appear to be cutting back on non-essential purchases, such as gadgets and meals at restaurants. Spending at restaurants and bars slipped by 1.2% in June, its steepest decline since February 2008, while department store purchases marked its fifth consecutive monthly drop as it fell by 1% last month.

Meanwhile, the 1.8% pickup in automobile demand was enough to make up for the decline in non-essential spending. Sales of cars and light trucks reached an annual rate of 15.89 million, its fastest pace of increase since November 2007. Purchases of building materials and furniture also increased, as homeowners continued to furnish their residences.

From these consumer spending patterns, we can deduce that the low interest rate environment is one of the main reasons why retail sales managed to stay positive for June. Mortgages and car loans were relatively more affordable in the recent months, encouraging consumers to also spend more on items related to automobiles and homes.

As the effect of cheaper borrowing costs starts to wear out though, the coming months could post a slowdown in consumer spending. Economic analysts, such as those from Morgan Stanley and Barclays Plc, immediately revised their U.S. GDP forecasts lower after the release of the June retail sales figures.

Moving forward, the data also suggests that U.S. economic growth won’t be relying on the consumer sector as much. Although consumer spending could continue to contribute modestly to economic activity, other sectors will have to step up their game to pick up the slack.

The U.S. dollar’s reaction to the weaker than expected report reveals that we’re seeing reduced confidence that the US economy could survive with less stimulus as the Fed plans to taper bond purchases by the end of the year. Demand for the dollar could remain shaky unless upcoming U.S. data shows signs of a strong pick-up.