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July's retail sales data might be ugly

This article first appeared in the Morning Brief. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe

Friday, August 13, 2021

Data suggest retail sales slumped last month

Before the market opens next Tuesday, the July report on retail sales will be released — and the numbers could be ugly.

Data from Bank of America Global Research published Thursday suggest the Census Bureau's report on retail sales will show a 2.3% decline in July from the prior month. Current Wall Street expectations are for sales to decline by a more modest 0.2%, according to data from Bloomberg. In June, retail sales rose 0.6% from the prior month, and May's data was revised higher as well.

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"Total card spending [in July] was down 1.3% on a month-over-month seasonally adjusted basis," wrote Bank of America economists, led by Michelle Meyer. "Slicing the data further, retail sales ex-autos was down a more notable 2.4%."

Driving this decline in BofA's view is a change in Prime Day, which this year took place in late June instead of mid-July, as had been the case in the years before the pandemic. Additionally, spending on services has moderated, and that category isn't enough to offset the decline in goods spending.

The drop in goods spending, of course, is to be expected as goods drove consumer habits in 2020, and the re-opening of the economy presents more service-related spending opportunities relative to last year. But the moderation in consumer spending also shows that while the pandemic has had a waning influence on markets and the economy, it still holds considerable sway over the growth outlook.

Spending on airlines has softened in recent weeks after rising above 2019 levels earlier this summer. (Source: Bank of America Global Research)
Spending on airlines has softened in recent weeks after rising above 2019 levels earlier this summer. (Source: Bank of America Global Research)

Earlier this week, Southwest Airlines (LUV) lowered its outlook for the third quarter and said it expects the recovery in airline spending to moderate into the fall. In a filing with the SEC published Wednesday, Southwest cited a deceleration in short-notice bookings and an uptick in cancellations — which the company said "are believed to be driven by the recent rise in COVID-19 cases associated with the Delta variant." And Bank of America's data suggests these impacts aren't necessarily limited to Southwest alone.

"Our proxy for services spending, which includes airfare, lodging, entertainment, restaurants and bars, continued to slide in the most recent week to a two-year growth rate of 5.7%," Bank of America writes. "This is down from the recent high in late-June of 14.6%. The biggest deceleration continues to be in spending on airfare which we think reflects concerns over the Delta variant."

Of course, just as "peak growth" theories suggest the economy is not contracting but only growing at a slower rate, so too would this retail sales data suggest the consumer recovery is just moderating. Moreover, retail sales have been above their pre-crisis highs for some time, and the health of consumer balance sheets is a big part of what is driving optimism around the continued recovery.

But we're in a period when strong jobs data and tempering inflation have put the focus on the Federal Reserve to begin more forcefully forecasting a change in their policy stance. A jarring retail sales figure could shake up that storyline.

By Myles Udland, reporter and anchor for Yahoo Finance Live. Follow him at @MylesUdland

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