May retail sales declined by 0.3% m/m, missing expectations

U.S. retail sales dropped for the first time in five months, with a 0.3% m/m decline in May. While sales missed expectations, the report was not entirely negative says KPMG Senior Economist Ken Kim. Watch his analysis of the report here:

Kenneth Kim

Kenneth Kim

Senior Economist, KPMG US

+1 212-954-6144

Video summary

KPMG Senior Economist Ken Kim gives his analysis of the May retail sales report.

As U.S. retail sales fall, the economic outlook loses some momentum

U.S. retail activity posted the first drop in five months in May 2022, declining 0.3% from April. The Commerce Department figures were certainly unexpected. Economists had predicted a small 0.1% increase, but decades-high inflation finally appears to be moderating demand and spending.

Big picture, however, the slowdown is not necessarily bad news for the nation’s economy. A deep dive into the data surfaces three interesting trends to watch as the economy moves forward in 2022.

Inflation is hammering durable consumer goods demand.

The high inflation environment is weighing on consumers’ moods. This month’s numbers showed notable declines in durable goods categories, which are a good measure of consumer confidence about the future, since they are paid off over time. These include sales of motor vehicles and parts, which fell by 3.5%, and furniture store sales, which declined by 0.9%. Discretionary categories, such as electronics spending, also fell by 1.3%. Gas stations sales—where nationwide prices have topped $5 per gallon—was one of the few areas where spending went up, another result of inflation.

Americans are shifting their spending towards services.

Declining sales on merchandise may also be a sign that consumers are more interested in paying for experiences, such as entertainment and travel. Spending in May rotated from goods to services categories, reflecting a broader shift seen for three straight months. Sales at restaurants and bars rose by 0.7% in May after rising by around 2.5% in March and April. Fear of missing out (FOMO) on experiences will continue to draw consumption towards services-related spending. In fact, several retailers have already announced that they are carrying too much inventory and are putting markdowns in-store over the coming months. 

There’s hope for a needed supply and demand correction.

It may sound illogical, but this is a case where some slowdown in consumption may actually be good news for the economy. We believe curbed retail sales could help fix the current imbalance in demand and supply, the cause for higher inflation. As such, we now project growth for Q2 2022 GDP of 1.0-1.5% seasonally adjusted, versus our earlier estimate of 2.4%. The key question is how much of a heavy hand the Federal Reserve will play in either nudging or forcing inflation lower this year and next—and ultimately, how the economy reacts.