June’s strong retail sales report is good news for retailers

The news: US retail sales were stronger than expected in June, despite the vibecession.

• Excluding auto sales—which were negatively impacted by a cyberattack at car dealers—retail sales were 0.4% higher month over month (MoM) and 3.4% higher year over year (YoY), per the US Commerce Department. That significantly outpaced the 0.1% MoM gain economists expected.
• All except three categories (motor vehicles and parts; gas stations; and sporting goods, hobby, musical instrument, and book stores) reported MoM increases.
• Retail sales minus gas and autos rose 0.8% MoM, well ahead of the 0.2% consensus estimate and the biggest jump since early 2023.

Expectations vs. reality: The robust sales figures clearly illustrate the gap between how consumers report they are feeling and their behavior.

• Consumer sentiment in July remained “stubbornly subdued,” according to the director of the University of Michigan’s Surveys of Consumers, Joanne Hsu, due to persistent concerns over high prices and economic uncertainty.
• Yet spending between April and June was up 2.5% YoY, per the Commerce Department—an acceleration from Q1, when sales rose just 1.5%.

Some of that divide may result from the growing disparity between affluent and lower-income consumers, the latter of which are feeling stretched due to the rising cost of paying down debt and higher living expenses.

• That trend is clearly evident in CPG earnings, with some companies—notably PepsiCo—signaling weakness and trade-down behaviors from lower-income shoppers, while others, like Procter & Gamble, find success by leaning into higher-priced, premium products.
• JPMorgan sees “a little bit of weakness in the lower income segments” as consumers allocate a larger share of budgets to non-discretionary spending, CFO Jeremy Barnum said during the bank’s Q2 earnings call—a finding echoed by BNY, which noted that households lacking the ability to invest in the stock market show signs of having run through their pandemic-era savings.
• Slowing wage growth could also be denting lower-income households’ confidence, although in real terms buying power is increasing as inflation ebbs. Real average weekly earnings were up 0.6% YoY in June, as a 0.8% increase in hourly earnings offset a 0.3% decrease in the average workweek, per the US Bureau of Labor Statistics.

The big takeaway: On the whole, consumers are in good shape—but they don’t feel that way, due to persistent concerns about diminishing savings, higher prices, and elevated interest rates, as well as the upcoming election.

Retailers will have to put their value initiatives front and center to overcome that lingering pessimism, either by cutting prices or leaning into promotions and seasonal sales events to get shoppers to open their wallets.