US consumer caution prompts retail sales fall
The recent decline in US retail sales, marking a 0.6% month-on-month drop in July—the weakest performance in over a year—signals growing consumer caution amidst a cooling internet sales environment post-Amazon Prime Day. According to the insights provided, high gasoline prices and a soft jobs market have contributed to this consumer hesitance, especially regarding larger purchases like automobiles. This trend could limit GDP growth significantly as retail sales constitute a substantial 41.5% of total consumer spending; the desk references this data from ING, whose Chief International Economist James Knightley provided an extensive analysis of the situation. As there are no immediate high-impact macro events on the calendar, this landscape is likely to influence trading strategies in the coming weeks.
What the desk is arguing
The desk contends that the dismal retail sales performance serves as a critical indicator of US consumer behavior, hinting at potential economic weakness. Per the full note, July's retail sales numbers showed an unexpected decline against expectations, where the control group fell 0.4%, contrary to the anticipated growth of 0.3%. This discrepancy emphasizes the increasing caution among consumers, likely exacerbated by current economic pressures.
The most notable contributors to this decline include a 2.4% decrease in auto sales and a 2.2% drop in internet sales, suggesting that the stimulus from the FIFA World Cup and local celebrations was insufficient to offset underlying concerns. The only standout category was clothing, which increased by 1.9% month-on-month, indicating a shift in consumer priorities towards necessary items.
Where it sits in our coverage
Our consensus target for the relevant currency pair is 1.075, with a range set between 1.04 and 1.12. Specifically, our tracked firms have set the following targets for December 2026: - jpmorgan: 1.10 - bofa: 1.04
The desk's current outlook is more pessimistic than that of bofa, which stands at the lower end of the target range, reflecting a fundamental divergence in interpreting consumer spending trends.
How other firms see it
Firms such as jpmorgan and others appear aligned in their cautious stance toward the economic outlook, suggesting a pervasive sentiment of low consumer confidence. On the flip side, bofa remains contrarily optimistic regarding economic resilience.
Pay close attention to the EUR/USD trajectory, as it could reveal insights into the potential ripple effects of this retail downturn on broader dollar dynamics. Additionally, watch for signals from the Federal Reserve, as their response to weakening retail sentiment might alter future rate expectations.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US retail sales fell 0.6% month-on-month in July, the weakest since last year.
- 02Consumer caution is growing, especially for big-ticket items like automobiles.
- 03Retail sales represent 41.5% of total consumer spending, highlighting the importance of this data.
- 04The only strong performance came from clothing sales, rising 1.9% month-on-month.
Market implications
Watch for the EUR/USD pair closely as continued weakness in retail sales may pressure the dollar's strength. The prevailing sentiment may also affect positioning strategies ahead of potential central bank shifts in response to deteriorating consumer confidence.
Risks to this view
A sharp rebound in consumer spending or unexpected positive employment data could invalidate this bearish outlook, leading to a reversal in market expectations and greater dollar strength.
Older quick take Quick take Published 14:04 United States US consumer caution prompts retail sales fall US retail sales posted their weakest performance in over a year as internet sales cooled following Amazon Prime day and consumers became more cautious on purchasing big-ticket items, such as autos. A soft jobs market and financial pressure amongst low and middle-income households aren't helping, either US retail sales have posted their weakest performance in over a year Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download James Knightley Chief International Economist, US -0.6% MoM Retail sales in July Retail sales held back by internet and auto weakness Today's US macro data includes very poor US retail sales numbers for July, falling 0.6% month-on-month at the headline level versus expectations of a 0.1% rise. This is the weakest performance in over a year.
The control group, which excludes volatile items such as autos, gasoline, building materials and eating out – and better tracks broader consumer trends – fell 0.4% versus expectations of a 0.3% gain, and June was revised lower by 0.1ppt to 0.4% MoM. This is all the more surprising given the FIFA World Cup, which had lifted tourist numbers and the 250th Independence anniversary celebrations. There has been hot weather that can influence footfall, but the only category to perform well was clothing at +1.9% MoM, while health and personal care posted a respectable +0.7% increase.
The underperformers were autos (-2.4% MoM), where higher gasoline prices may have led potential buyers to rethink their decision, and non-store/internet (-2.2%), which likely reflects a subsequent slowdown after the Amazon Prime Day discounts on 23-26 June. Retail sales levels Feb 2020-100 Source: Macrobond, ING "> Source: Macrobond, ING GDP contribution will be soft, but services can rescue things Retail sales account for 41.5% of total consumer spending, with services such as hotels, airline tickets, insurance, etc. accounting for slightly more. Higher-income households tend to account for more spending in these areas, and we expect those components to hold up better than retail.
Lower and middle-income households have a slight skew towards spending more on physical products, and concerns about job security and squeezed spending power are likely weighing on demand here. A 2.7% household savings ratio, well below the 6% long-run average, and a subdued jobs market with tepid wage growth underscore concerns about continued weakness. We also have to consider that this is a nominal dollar figure, so when we try to translate what it may mean for 3Q consumer spending growth within GDP, we have to adjust for price changes, which means that in volume (real) terms, it is going to be an even bigger drop.
Nonetheless, we still think there is scope for a rebound in August and continue to predict a 2-2.5% annualised growth rate for 3Q GDP, boosted by an ongoing tech investment boom, after the rather disappointing 1.5% outcome in 2Q. US Retail sales GDP Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument.
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