Morning Brief: Data suggest retail sales slumped last month

Myles Udland breaks down Friday’s Morning Brief, which details the factors contributing to a slump in retail sales as data backs up a decline in consumer activity across multiple data points showing signs that the pandemic still holds considerable sway over the growth outlook.

Video Transcript

- We start with the morning brief and Myles Udland is looking ahead in the brief this morning to the retail sales report which comes out next Tuesday. Brian's $8 bottle of water aside, you know, we've been getting some interesting reads on consumer spending going into this report. And as you frequently do, one of the places you turn to sort of get a read on how things are looking is to Bank of America because they tend to look at card spending data. So what are we bracing ourselves for or preparing for on Tuesday, Myles?

MYLES UDLAND: Yeah, so Bank of America's internal data suggests that we'll see a decline of 2.3% on retail sales in July compared to the month of June. Now, in June, retail sales were up 6/10 of 1%. That was a surprising beat relative to expectations.

We also saw the numbers for May revised higher. So we are coming up against tough sequential comps month over month. But a 2.3% drop in July would certainly, I think, raise some questions just about-- or it would require more conversation, let's say, about the health of the consumer and where we are at in this recovery cycle, particularly since as of today consensus expectations according to Bloomberg are for a 2/10% drop.

So two percentage points spread between where consensus is at and where Bank of America's data suggests we could come in is-- if it comes to pass, if that indeed comes to pass, that will be a jarring number for the market. And the basic story here-- you know, we talked earlier in the program about how investors are thinking about the impact of the Delta variant.

And they're thinking about it very differently from consumers because the data that Bank of America has suggests consumers are very much looking at the spread of the virus. And with the changing shape of the economy, with some of those unemployment benefits rolling off, with spending on airfare-- specifically one area that was called out in this report-- coming down a little bit, and with having just come through a consumer spending boom in the springtime-- and apparel was up. We obviously saw as a percent of a consumer's wallet, you know, if you went and bought a car, you had to pay up for that car. Perhaps not as much of a cushion now in the proceedings.

And so there looks to be a decent pullback in the consumer. And just in the last 10 minutes, we got the initial reading on consumer sentiment in August from the University of Michigan. That number plunged.

So certainly, consumers appear to be, to some extent, retrenching just a little bit. Now, sure, there are some compositional factors here. Goods spending cooling off after such a strong 2020 into 21. Services not being able to catch up because you still have some things closed, you have various places that are understaffed, so on and so forth.

But really, what we are talking about is a consumer that simply does not look as raring to go as we saw a few months back. At some point, you knew that the economy would stop growing at as fast a rate. And this data, if indeed this is what we get next Tuesday, is certainly a part of putting together that puzzle.

- You mentioned the sort of compositional effects. You know, you're talking about everything here from clothing to cars to furniture. Does it matter at all where the declines come from? I don't know if Bank of America, for example, broke any of that down and in their expectations.

MYLES UDLAND: Well, it certainly matters. I mean, so retail sales is a nominal number. So it's, you know, what's the total number of retail sales?

And yeah, sure, by category, you have the different growth trajectories. But if you are-- I mean, so they're calling for the nominal spend in retail sales in July to be lower than it was in June. And certainly, compositional effects are a part of that, right?

A $600 couch is more than a $60 meal. You don't have to have a PhD in economics to know that. And so that certainly plays some part of why we are seeing this number likely to be a lower number.

The simplest way that Bank of America did it in their note was you have good spending coming down, which again all else equal, likely to be more expensive items, so a higher level of overall retail spend. You have some services-- you know, travel experiences, meals out such a big part of consumer wallets. That's coming up at a slower pace than goods are coming down.

And then the balance of services is going to the doctor, hiring a tutor for your kid, all that kind of stuff, getting a lawyer-- that part of services, that doesn't really change. So that spend is pretty static. So again, the economy has always created on economic growth. It was always created on the margins.

So on the margins, we are seeing marginally less spend on more expensive items and a marginally disappointing, relative to some estimates, spend on some less expensive items that are part of the reopening trade. And I think that's kind of how you certainly square that picture, at least if you're looking at it holistically that way. That's it.

- Right.

MYLES UDLAND: All right.

- That's it, sorry.

MYLES UDLAND: I think-- yeah, I think this-- I'm just going to say this on the show. I think this whole placeholder of like we do this at the 10 o'clock every day because it just makes sense, it just doesn't work when it's my block. Getting out of here, it just doesn't work.

It never-- it's always awkward. So we'll save that for another time. But I'm spending my public time airing a private message.