The U.S. retail sales increased more than expected in May, showing that people are still spending money even with high prices, according to the Commerce Department. Households spent more on motor vehicles, even though they were paying higher prices for gasoline during the same period.
Experts said this strength in spending may slow down later because tax refunds are reducing and prices are still high, as per the report by Reuters. Job growth has also improved recently, which together with strong sales shows the economy is still resilient even after the oil price shock.
Strong spending trend
The Federal Reserve is expected to keep its benchmark interest rate in the 3.50% to 3.75% range in its meeting, but may remove its earlier “easing bias”. Economist Scott Anderson from BMO Capital Markets said strong May sales and faster spending could worry the Fed as it tries to control inflation pressures, as reported by Reuters.
The Commerce department’s census bureau said that after a revised increase of 0.4% in April, retail sales have shown a 0.9% jump in May, which is higher than the prediction of 0.4 % most economists did. Inflation adjusted, retails were up by 0.4%, as per Reuters. On a yearly basis, retail sales jumped 6.9% in May, showing strong overall consumer demand. This strong spending is different from weak consumer sentiment, as people still feel pressure from inflation but continue buying goods.
Energy prices and demand
Economist Stephen Stanley from Santander said in the report by Reuters, if energy prices keep falling, consumer spending will stay stable, but if prices rise again, spending habits may become unsustainable.
Also read: How will Fed’s June interest rate decision affect your finances? Here’s what you need to know
Gas station sales rose 3.4% in May, helping overall retail numbers, and were already up 2.4% in April and 26.5% higher compared to last year. Spending has been supported by tax refunds and a stock market rally, but economists say this is also reducing savings, especially for lower-income groups facing higher fuel costs. Some consumers are now visiting stores more often to look for discounts, according to Bank of America Institute data, though there is no major sign of increased borrowing yet.
Credit pressure rising
Inflation has been rising faster than wages for the last two months, and savings rates fell to a four-year low in April. A NerdWallet survey found that 35% of Americans may need to use credit to cover some expenses this month, showing growing financial stress. NerdWallet economist Elizabeth Renter said relying on credit for spending is not sustainable and may lead to rising debt problems for households, as cited by Reuters. Sales at auto dealerships rose 1.2%, showing recovery in vehicle demand.
Online retail sales increased 1.5%, while furniture store sales rose 1.0%. Health, personal care, clothing, and hobby-related store sales also increased during the month. However, food services and drinking places saw a small drop of 0.1%, which is a key sign of household financial pressure. Electronics and appliance store sales fell 0.5%, while building material and food stores remained unchanged. Economists said weaker performance in some categories shows that consumers are becoming more sensitive to prices.
Core spending and growth outlook
Core retail sales, which exclude autos, gas, building materials, and food services, rose 0.7% in May after rising 0.5% in April. These core sales are closely linked to the U.S. GDP consumer spending, which makes them an important economic indicator. Consumer spending, which makes up more than two-thirds of the U.S. economy, appears to be picking up again after slowing earlier this year. The Census Bureau also reported strong business inventories in April, which may support future growth.