July retail sales were flat compared to a month earlier as sharp declines in gasoline prices and auto purchases masked better results in other categories.  Excluding gasoline and autos, retail sales rose a better-than-expected 0.7%.  The significant drop in gas prices likely aided consumer sentiment while freeing up cash to spend elsewhere.  The Fed continues to navigate a tenuous path as it seeks to cool the economy enough to tame inflation, but not so much as to cause a recession or a surge in unemployment.  Today’s report suggests consumer spending, one of many data points considered by the Fed, is solid enough for the central bank to continue its path of aggressive rate hikes later this year.

  • Real retail sales increased 1.8% year-over-year.  In July, retail sales grew 10.3% compared to a year ago netting 1.8% real growth after adjusting for 8.5% inflation.  Increased spending on gasoline (+40% YoY) accounted for a large portion of the nominal increase, but strength was also evident in nonstore retail (+20%) and food services and drinking places (+12%) both of which outpaced inflation. Historically, real year-over-year declines in retail spending have been one of many leading indicators of a recession although this indicator alone has proven more volatile and has produced several false positives over the years.
  • Real retail sales unchanged month-over-month.  In July, retail sales matched levels observed in June in both nominal and real terms (MoM inflation was also 0.0%).  Sales at gasoline stations fell 1.8% and auto sales fell 1.6% offsetting better results in other categories including nonstore retailers (+2.7%), building materials (+1.5%), and brick and mortar retail (+1.5%).  All told, nine of thirteen categories showed increases.