Kiplinger Retail Outlook: Consumers Turning More Cautious

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Retail sales rose a modest 0.1% in May, following a small decline in April. Core sales (which exclude motor vehicles, gasoline and food services) rose 0.3%. In-store sales have inched up a tiny amount in each of the past three months.

Motor vehicle sales jumped 0.8% in May, though they are up only 0.5% so far for the year. The strong run of restaurant sales growth appears to be over now, with sales still below where they were at last year’s close. Furniture and home furnishing sales have dropped in each of the past three months. 

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Consumer spending on services excluding restaurants rose by a moderate 0.4% in April, the latest month for which data are available. This spending is up 8.3% at an annual rate over the past eight months. Strong growth in services spending and slowing growth in goods spending signals a switch by consumers to buying more services, as their need for goods levels off. Purchases of goods soared at the beginning of the pandemic in 2020. While services have picked up since then, the share of goods in household spending is still above its prepandemic norm, which implies that the switch to more spending on services has room to run.

Consumers are becoming more cautious in general, however. In addition to the plateau in goods sales so far this year, spending on services is also slowing after a strong run. Eating out is typically a good measure of consumers’ willingness to splurge, and growth in this category has disappeared. Spending on other services continues to grow but did so at a slower rate in April than in any of the previous seven months. Motor vehicle sales will continue to improve, but demand is not as red-hot as it used to be, as dealer inventories have largely been restored. Sales related to home purchases and improvements, such as building materials, furniture and home furnishings, will likely continue to be slow, reflecting the impact that higher interest rates have had on the housing market in general. 

A gradually cooling labor market is likely causing consumers to think about increasing their savings. Saving rates have been much lower than their historical norms and may begin to rise slowly, cutting into the cash available to support future retail spending. Higher interest rates on consumer loans may weaken some households’ spending power, too.

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