Retail sales rose for the second consecutive month in July, by 0.5%, while June results were revised upward slightly to 0.2%. Stronger sales were consistent with Wednesday’s same-store sales release which showed year-over-year spending remained at a relatively strong pace.
Year-over-year retail sales reached a healthier 8.5%, the highest point since February.
Many retailers accelerated the start of their back-to-school shopping push in an apparent effort to increase traffic and get a jump on competition. While this may have helped July sales, the move may also trim the normal August boost in what has been expected to be a disappointing back-to-school season.
The back-to-school drive often sets a tone for the later holiday shopping season. As August progresses, retailers will look for the recent improvement in sales to continue as a hopeful precursor to a better holiday season.
Higher gasoline prices in July contributed to the uptick in gasoline station results. Given the sharp decline in gasoline prices in recent weeks, a reversal in August in this retail segment appears likely, but could also provide a boost to consumer sentiment and provide some greater flexibility in spending budgets for other goods and services.
As expected, auto sales improved in July, although most economists believe the ripple effects of the supply chain disruptions resulting from the Japanese earthquake have still not fully worked their way through the system. This could provide a further boost to auto sales in future months, although the increasing risk of recession could spook potential buyers and diminish the impact.
Confidence has been once again receding for consumers and businesses alike. The numerous significant sources of uncertainty that persist, even following the temporary resolution of the debt ceiling debate, create trepidation for what’s yet to come.
The poor employment situation also hovers like a dark cloud, although recent data has shown some marginal improvement. With economic conditions deteriorating and the outlook increasingly murky, consumers could assume a more cautious stance and increase their savings at the margin.
Broadly, we remain cautious in our outlook as we seek greater clarity around the short-term direction of the economy and evolving probability of recession or reacceleration from here. With growth weaker than expected in the first half of this year, the risks of another recession have increased. It seems that the best case in the near term would be for the economy to bump along at a slow pace, while the potential for a recession cannot be overlooked.