I have a surprise for you. On second thought, it probably comes as no surprise at all. After a little bit of a sales slowdown as spring turned into summer and fear-mongering claims of recession grew, flooring retailers en masse are telling me sales have picked up again. It might defy logic, and it certainly contradicts the fears caused by media-favorite words like “inflation” and “recession.” So it begs the question, to take a famous quote from legendary football coach Vince Lombardi, “What the hell is going on out there?”
Here’s the backdrop: US retail sales were unexpectedly unchanged in July as declining gasoline prices put more money in consumers’ pockets. Consumer spending appeared to pick up at the start of the third quarter, further assuaging fears the economy was in a recession.
Combined with strong wage gains from a tight labor market and ample savings, that should help to underpin consumer spending in the months ahead. The downside of this positive news will keep the Federal Reserve on its aggressive monetary policy-tightening path to bring inflation closer to its 2% target—not the greatest situation for the housing market.
“While consumers are feeling the burden of still-elevated prices, they remain resilient,” said Kathy Bostjancic, chief US economist at Oxford Economics in New York. “The combination of the strong labor market and sturdy consumer spending looks to keep the economy out of recession territory.” In terms of sheer numbers, July’s flat reading in retail sales followed a 0.8% increase in June. Sales rose 10.3% on a year-on-year basis in July. Of course, much of that gain has to be attributed to price increases as retail sales are mostly goods and not adjusted for inflation. Taking that into account, the retreat in gasoline prices from record highs in July resulted in prices for goods falling 0.5%. That means inflation-adjusted retail sales increased 0.6% last month. Economists say that would put consumer spending—which accounts for more than two-thirds of US economic activity—on track to grow at about a 3% annualized rate in the third quarter.
Excluding automobiles, gasoline, building materials and food services, retail sales increased 0.8% last month after rising 0.7% in June. These so-called core retail sales correspond most closely with the consumer spending component of GDP. The consumer spending profile also got a boost from upward revisions to May data to show core sales increasing 0.8% instead of declining 0.3% as previously estimated.
“The retail sales report shows more recent momentum for consumers than we had anticipated,” said Daniel Silver, an economist at JP Morgan in New York. “This adds some upside risk to our 1% real GDP forecast for the third quarter.”
So, what does that mean? Repeat after me: “We are not in a recession. We are not in a recession.”
Ted Rossman, a Bankrate analyst, said: “Retail sales are holding their own right now. That’s actually a pretty good sign for consumers and the economy, all things considered.”
Many flooring retailers attest to the above. A few who had Labor Day sales, including Michael Longwill of Airbase, told me it was their best in company history. Sam O’Krent recently had his best four-day sale—ever.
This may seem counterintuitive for some, but it’s not so farfetched. While some had anticipated a drop-off in home spending as the pandemic subsided, the wear and tear from being at home mixed with running lists of pending home improvement projects led to higher spending on home furnishings, including flooring, and items related to construction, according to Katie Thomas of the Kearney Consumer Institute. To that end, last month Home Depot reported its highest quarterly sales and earnings in company history.
Bottom line: As long as gas prices remain low, Americans are likely to keep up their spending—although many companies are managing expenses tightly in case of an unexpected pullback.