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Fundamental Analysis

US: Retail Sales Decline for the Second Consecutive Month in June

Typography

Retail sales fell 0.2% in June according to the advance Census Bureau report. This was well below expectations for a 0.1% gain, although it comes atop of an upward revision - May's sales were revised up to a decline of 0.1% from 0.3% reported previously.

Sales excluding autos also declined 0.2%, as receipts at motor vehicle & parts dealers (+0.1%) were largely flat in line with the lackluster performance in auto sales during the month. Gasoline station purchases fell 1.3% on lower prices, with sales excluding autos and gas down a more subdued 0.1%, but still below the flat reading expected by the street.

Excluding gas, autos, building materials (+0.5%), and food services (-0.6%), the so-called 'control group' used in calculating GDP, was down 0.1% on the month - also below the flat reading that was expected. Sales in the control group were dragged down by miscellaneous (-3.1%), department stores (-0.7%) and sporting goods (-0.6%). These were more than offset by gains in non-store and e-commerce retailers (+0.4%), general merchandise (+0.4%), and health & personal care stores (+0.3%).

Key Implications

The weak retail sales print in June is without a doubt a disappointment as far as the resilience of the consumer is concerned. While the slight upward revision to May helps offset some of the bleakness in the June print and some of the weakness in the headline can be attributed to weak price backdrop (telegraphed in the CPI report released at the same time) leaving our second quarter GDP estimate largely unchanged near 3%, the story is less upbeat as far as momentum heading into the third quarter.

Given the weak handoff in the control group consumption appears to be decelerating closer to the 2% mark heading into the third quarter. Together with the relatively broad-based weakness in discretionary spending categories, it leaves us somewhat concerned and somewhat puzzled - particularly given the continued strength in the labor market in recent months.

The weakness is both the retail sales and CPI report is likely to be a key topic of discussion when the Fed meets at the end of the month. While we don't expect much to come from that meeting and still expect the Fed is to proceed with its normalization of the balance sheet come September, expecting an improvement in data flow in the coming months, another hike later this year seem less and less likely at this point.

Author: TD Bank Financial Group Website: http://www.td.com/economics/
TD Bank Financial Group
The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.
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