Retail sales rise more than expected amid labor market softening

REAL ECONOMY BLOG | June 15, 2023

Authored by RSM US LLP

Retail sales rose more than expected in May, pointing to continued resilience in spending that might push the long-awaited recession further down the road. The strong sales figure, though, was reported as layoffs continued to increase last week, government data released on Thursday showed.

While the Federal Reserve’s new projections pushed back the central bank’s forecast for the start of a recession to early next year, we will need to see more strength from both spending and the labor market to update our call. RSM forecasts a recession to start in the second half of this year.

At the center of the discussion over a recession—and whether it will take place at all—is the labor market, which has shown surprising strength through the Fed’s campaign to raise interest rates.

Last week, though, initial jobless claims reached 262,000, the highest level since November 2021 and above market forecasts.

That was the second week in a row that new claims surpassed 260,000, pointing to more increases in layoffs to come.

The mixed signals from the spending and labor channels make it harder to pinpoint the timing of the next recession if it is indeed going to take place. There are clear risks both to the upside and downside to our recession prediction.

On the upside, excess savings, a resilient labor market and summer spending on services—which are not covered by the retail sales data—might keep spending intact.

But on the downside, nothing guarantees that those savings will be spent as consumers might reduce spending in anticipation of a slowdown.

Retail sales

Total sales rose by 0.3% in May, down slightly from the 0.4% increase in April that was helped by strong auto and building materials sales.

Adjusting for inflation, sales volume most likely rose in May as price growth for all items came in at 0.1%, while goods price growth—accounting for the majority of the retail sales data—was unchanged, according to the most recent consumer price index report.

Stripping away those and other volatile categories, the control group—which feeds into the calculation of gross domestic product—rose at a more modest 0.2%.

Because the advanced sales data is often noisy—and subject to significant revisions later on—we prefer looking at the three-month moving average to identify the longer-term trend.

On that basis, sales of all items continued to decline in May, down by 0.06%, while the control group rose by only 0.04% month over month.

In a sense, the higher-than-expected sales number might not be as strong as the top-line figure suggested. Auto sales, which increased by a robust 1.4% on the month, were also a concern for later reports as sales of new vehicles are often volatile.