By Gregory Heym, BHS Chief Economist and and host of Crossing The Line
This week, we discuss the latest on consumer spending and what the Fed said about rates.
Retail Sales Fell More than Expected in May
Retail sales declined 0.9% last month, a bigger drop than the 0.6% Dow Jones forecast. As if that wasn’t scary enough, April’s figure was revised downward to a 0.1% decrease. Here are some more details from the report:
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Retail sales were up 3.3% from a year ago but since this data isn’t adjusted for inflation, and prices rose 2.4% during this time, real retail sales are up less than 1% from May 2024.
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The 0.9% monthly decline in retail sales was the largest decrease since March 2023.
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It’s a bit surprising that sales fell so sharply even as consumer sentiment improved in May due to the pause on many new tariffs.
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Some notable declines last month were seen in auto sales (-3.5%) and gas stations (-2.0%). The drop in auto sales can be attributed to consumers rushing to buy cars before tariffs took effect, and even with this decline auto sales are still up 2.5% from a year ago. Gas station sales were down in May due to a 2.6% decline in gas prices, not a drop in demand.
That’s enough details, let’s get into what this all means. After being essentially flat the last four months of 2024, retail sales have been on a wild ride. We saw sharp declines in January and May, flat data in February and April, and a 1.5% surge in March that was the highest increase since January 2023. Basically, an upside-down V.
If we throw out March’s figure, since it was driven by a rush to buy imported goods before tariffs went into place, we get a pessimistic view of economic growth. Remember that consumer spending is 70% of GDP, and while we saw a negative first quarter GDP figure due to a surge in imports, we will see a decent second quarter GDP figure because of a lack of imports.
See a pattern here? Economic data in 2025 should be broken down into two categories: pre-tariffs and post-tariffs. We won’t really know how strong the economy is until “Tariffmania” ends.
The Fed Leaves Rates Alone
To nobody’s surprise, the Federal Reserve left rates unchanged at their meeting this week. So why am I writing about this? Two words: dot plot.
At the end of each quarter, the Federal Open Market Committee issues their economic projections, which include forecasts for rate cuts or hikes. This month’s projections show they expect two rate cuts this year, probably starting in September. While we are happy about their planned rate cuts, they also made some adjustments to certain economic indicators. These predictions included slower economic growth than their March forecast, along with higher levels of unemployment and inflation, none of which is good news.
At this point, we’ll take all the rate cuts we can get, even if we must wait until September. Just remember that Fed rate cuts don’t automatically mean mortgage rates will come down.